Small caps and emerging markets lead risk rally

By Mark Barnes, head of investment research (Americas) and Christine Haggerty, global investment research

Equity markets were broadly higher in August, propelled by a late-month resurgence in risk appetite. But this impressive finish belies the powerful risk-off tensions on display for much of the month.

Those tensions rose with mounting worries about the rampant Delta variant, stubbornly high inflation (particularly in the US) and related uncertainties about the Fed’s policy response. Market anxieties culminated in a sharp ‒ yet short-lived ‒ downdraft across global markets mid-month.

But sentiment turned bullish in the final weeks, as a growing chorus of Fed officials signaled a more vigilant stance on the recent surge in inflation, which it views as transitory, while remaining committed to its low-rate policies and focus on job growth.

The US 10-year Treasury yield ticked lower as inflation concerns eased, relinquishing most of its earlier gains.

Bipolar Dynamics

This bipolar behavior is best illustrated in the stunning late-month rebounds in emerging-market and small-cap stocks to the top of the performance rankings from the bottom of the list only weeks earlier.

The FTSE Emerging index rose 2.8% for all of August, and along with Japan and the US, outperformed the FTSE Developed index gain of 2.6%. At its trough in mid-August, the EM index had been trailing by more than four percentage points.

Small-caps enjoyed a similar renaissance. Though the Russell 2000 still lagged the Russell 1000 by 70 basis points in August (up 2.2% vs 2.9%, respectively), its late-month sprint significantly narrowed that gap, which had been as wide as 3.4 percentage points just 10 days earlier.

The small-cap comeback was more pronounced elsewhere, as shown below. Based on our global factor data, Size (smaller-cap) built on its strong YTD and 12-month outperformance in Asia Pacific ex Japan, EM and the UK in August, while upholding its lead in the US and Europe.

This post first appeared on September 9 on the FTSE Russell blog.

Photo Credit: Laura Wolf via Flickr Creative Commons


The FTSE Emerging Index provides investors with a comprehensive means of measuring the performance of the most liquid large- and mid-cap companies in the emerging markets. The FTSE Developed Index is a market-capitalization weighted index representing the performance of large and mid cap companies in Developed markets. The Russell 2000 Index is a small-cap stock market index of the smallest 2,000 stocks in the Russell 3000 Index. The Russell 1000 Index is a stock market index that tracks the highest-ranking 1,000 stocks in the Russell 3000 Index. Investors can’t invest directly in indexes.

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