Craig Thrasher, Portfolio Manager and Senior Research Analyst for the Kayne Anderson Rudnick International Small Cap portfolio, joins Managing Director Jordan Greenhouse on this episode of KayneCast. Thrasher discusses the impact of the global slowdown and geopolitics on International Small-Cap investing in Q3 2022 and how a devalued market may offer opportunities for investors.
European Small Cap Space Threatened by Geopolitical Instability
As with all of 2022, the Russian invasion of Ukraine, a broad global slowdown, and central bank tightening contributed to volatility in Small Cap stocks during Q3, especially in Europe.
Thrasher notes, “the biggest global impact of the Russian invasion of Ukraine so far has been on energy prices, and this has been most acute in Europe where most countries, to varying degrees, rely on Russia for a significant portion of their energy needs.” Spikes in energy prices negatively impact consumers and businesses, and Europe and the UK have had the “worst performing equity markets in the Small Cap space year to date.”
Low Valuations of Quality Companies and International Small Cap Markets
International Small-Cap markets responded to inflationary pressures and rising interest rates with a rotation out of growth stocks and into “value stocks.” The market response caused some headwinds in the KAR International Small Cap portfolio, which contains holdings that typically function as growth stocks.
Thrasher believes this trend, while generating a temporary loss in valuation, may offer opportunities to increase holdings in high-quality companies. He notes KAR has “several companies where the stocks have traded down dramatically while we think the fundamental outlook for the underlying businesses has not changed much. So obviously, this makes the valuations more attractive, and we believe in the long run it will be these fundamentals that will drive the performance of the stocks.”.
Listen to the podcast above to learn more about International Small-Cap investing in Q3 2022, and join us in Q4 for another stock market performance review.
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