The volatility in markets has left investors looking for risk-averse options, often avoiding small caps during a recession. Abrdn believes that this strategy, only returning to small caps post-recession, might not be a good one, and the time to start allocating might be sooner than investors think.

The investment management firm lists a couple of reasons why it might be a good idea to start investing in smaller companies. Abrdn compares the performance of small and large companies in different economic scenarios.

As per Abrdn, larger companies outperform smaller companies before the start of a recession, and during recovery periods smaller companies outperform their larger rivals.

“So far, so predictable. But the third point is not widely known: smaller companies have historically started outperforming large caps soon after a recession starts,” writes abrdn.

The investment management firm says that this is a potentially good entry point as valuations are attractive. In Europe, smaller companies are trading at a discount and a potential rebound would be good for long-term investors.

Abrdn says that there is a similar dynamic in the US and a valuation discount for small caps and large caps is the widest in over 40 years.

Talking about high inflation and a high interest-rate environment, the investment management firm says that central banks in developed markets have responded by aggressively hiking rates. While acknowledging that inflation is still high in certain markets and more rate hikes are anticipated, abrdn believes high inflation is not a worry for small cap investors.

“That’s because many smaller companies operate in niche industries or areas of the market with few players. They’re also often a critical link in complex supply chains or wider manufacturing processes,” says abrdn.

Although the traditional strategy during times of market turmoil would be to avoid small caps, abrdn says smaller companies might be more resilient during the current inflationary environment.

View the complete insight here.