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Debunking perceptions
Sensitivity to economic cycles – Investors often perceive small-cap stocks as being more sensitive to economic cycles, which can lead to concerns about underperformance during downturns. Additionally, their smaller size and market presence are commonly associated with higher price volatility. However, these assumptions do not always hold true. In Asia, small-cap equities have actually outperformed the broader market index over the past three, five, and 10 years. Moreover, their volatility has not consistently exceeded that of the broader market, challenging the notion that small caps are inherently riskier (Exhibits 1,2).
Exhibit 1: Cumulative total return of Asian Small Cap compared to broader Asia ex Japan index (%)
Allianz Global Investors, as at 30 June 2025. Volatility is calculated based on monthly returns of respective MSCI indices over the defined period. Market and economic conditions are subject to rapid change, all opinions and views expressed constitute judgments as of the date of the writing and may change at anytime without notice and with no obligation to update. Past performance, or any prediction, projection or forecast, is not indicative of future performance. The information above is provided for reference only, it should not be considered a recommendation to purchase or sell any particular security or strategy or an investment advice.
Exhibit 2: Cumulative total return of Asian Small Cap compared to broader Asia ex Japan index (%)
Allianz Global Investors, as at 30 June 2025. Volatility is calculated based on monthly returns of respective MSCI indices over the defined period. Market and economic conditions are subject to rapid change, all opinions and views expressed constitute judgments as of the date of the writing and may change at anytime without notice and with no obligation to update. Past performance, or any prediction, projection or forecast, is not indicative of future performance. The information above is provided for reference only, it should not be considered a recommendation to purchase or sell any particular security or strategy or an investment advice.
Exhibit 3: Average % of insider/stakeholder holding of mid & small cap companies in different regions
Source: FactSet, Jefferies, as of 10 July 2025. Based on current MSCI ACWI large, mid & small-cap universe. Insider/stakeholder holdings are defined as ownership positions held by non-buy-side entities such as officers, directors, public and private companies, private equity and venture capital firms, and ESOPs.
Exhibit 4: Average daily trading volume of small caps in Asia markets in 2024 compared to Europe (US$m)
Source: FactSet, Jefferies, as of 10 July 2025. Based on current MSCI ACWI large, mid & small-cap universe. Insider/stakeholder holdings are defined as ownership positions held by non-buy-side entities such as officers, directors, public and private companies, private equity and venture capital firms, and ESOPs.
What can Asian Small Caps do for your portfolios
Diversified exposure to Asia’s growth potential– One key reason Asian small caps may not exhibit higher volatility than the broader index is their more diversified exposure across both geographies and sectors. Unlike indices that are heavily concentrated in specific markets, Asian small caps offer access not only to China but also to other dynamic economies such as Taiwan and India. This geographic spread helps reduce concentration risk.
The same applies to sector allocation. While the broader index is dominated by just two sectors— financials and information technology, which together account for nearly half of its weight—the Asian small-cap index demonstrates a more balanced distribution across a wider range of industries (Exhibits 5 and 6). This diversification contributes to more stable performance and mitigates sector-specific volatility.
Exhibit 5: Geographical breakdown – Asian Small Cap vs All Cap
Source: IDS, MSCI, Allianz Global Investors, as of 30 June 2025.
Exhibit 6: Sector breakdown – MSCI Asia ex Japan Small Cap Index
Source: IDS, MSCI, Allianz Global Investors, as of 30 June 2025.
Exhibit 7: Asian small caps’ lack of sell-side coverage leads to market inefficiencies
Source: FactSet, Jefferies, as of 10 July 2025. Companies above include all tradable companies with market cap above 150mn and below 15bn USD domiciled in the following markets: Hong Kong, Singapore, South Korea, Taiwan, China, India, Indonesia, Macau, Malaysia, Pakistan, Philippines, Thailand. Only common stocks (excluding foreign shares) are considered. China A-Shares stock are excluded.
Exhibit 8: Historical correlation between Allianz Asian Small Cap and other major equity markets indices (weekly USD price returns)
Source: Bloomberg, Allianz Global Investors, as of 30 June 2025. (LHS) Correlation data is calculated based on historical return of Allianz Asian Small Cap Equity AT15 USD class and respective MSCI indices for the past 10 years, using weekly USD return. (RHS) . Chart shows analysis of returns for the MSCI Emerging Market index (used as proxy for Global Emerging markets) and MSCI AC Asia ex Japan Small Cap index (used as proxy for the Asia Small Cap markets) indices from 30 June 2010 to 30 June 2025. Percentages shown on the chart represent portion of portfolio allocated to Asia Small Cap. Allocations shown of the MSCI Emerging Markets Index and the MSCI AC Asia ex Japan Small Cap Index represents hypothetical non- investable portfolios. The chart is provided for illustrative purposes only to analyze the various allocations of the two indexes, does not represent actual performance, and is not indicative of future results.
Exhibit 9: Efficient frontier – Risk return profile of MSCI AC Asia ex Japan Small Cap + MSCI EM
Source: Bloomberg, Allianz Global Investors, as of 30 June 2025. (LHS) Correlation data is calculated based on historical return of Allianz Asian Small Cap Equity AT15 USD class and respective MSCI indices for the past 10 years, using weekly USD return. (RHS) . Chart shows analysis of returns for the MSCI Emerging Market index (used as proxy for Global Emerging markets) and MSCI AC Asia ex Japan Small Cap index (used as proxy for the Asia Small Cap markets) indices from 30 June 2010 to 30 June 2025. Percentages shown on the chart represent portion of portfolio allocated to Asia Small Cap. Allocations shown of the MSCI Emerging Markets Index and the MSCI AC Asia ex Japan Small Cap Index represents hypothetical non-investable portfolios. The chart is provided for illustrative purposes only to analyze the various allocations of the two indexes, does not represent actual performance, and is not indicative of future results.
Conclusion
Many common investor preconceptions regarding Asian small caps are not supported by the data. However, beyond this, there are also many compelling reasons to take a closer look at this segment. As artificial intelligence transitions beyond the hype stage into more concrete applications, small to medium sized firms across Asia are well positioned to benefit, often responding more swiftly and flexibly than their larger peers.
Additionally, the ongoing shift toward “China +1” supply chain strategies is creating new growth opportunities for companies in markets such as India and Southeast Asia. Meanwhile, rising consumer demand in both India and China is reshaping industries from healthcare to digital services.
For investors seeking underappreciated growth, we view Asian Small Caps as offering a rich landscape of companies led by experienced management teams, often with balanced ownership structures, focused business goals and prudent capital allocation.