Small Caps’ Revenue Exposure and the Global Recovery

Raina OberoiAna Harris

May 26, 2021


The volume of world merchandise trade fell by 5.3% in 2020, while travel services were down by 63%, according to estimates by the World Trade Organization (WTO). Nonetheless, the WTO expects recovery from the pandemic’s effects to be swift, with regional differences, and world merchandise trade volume to increase by 8.0% in 2021.

But even before the pandemic, global trade had shown signs of slowing, and the growth trend appeared to be flattening. There were several reasons, from increased political nationalism to environmental and social concerns. Also, as emerging economies develop, there has, historically, been a shift from capital-intensive to service-based activities, which are less dependent on imports and trade.

At a company level, smaller firms have tended to be more domestically driven than larger ones, as they may engage less in cross-border trade. One helpful way of visualizing this trend is looking at the sources of a company’s revenue to see how much is domestically vs. internationally sourced.

The chart below draws on MSCI Economic Exposure data to show the breakdown of revenues by region of origin for the MSCI Europe and the MSCI Europe Small Cap Indexes. We can see that the small-cap index had greater exposure to revenues that originated in the region (62% vs. 46% for MSCI Europe. 

While much has changed since the start of the pandemic, if the recovery continues to be more domestically driven, with government-support schemes for smaller businesses and companies rethinking global supply chains, it may be worth monitoring this trend. 

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Revenue Sources: Europe vs. European Small Caps

MSCI Europe Revenues by Region

MSCI Europe Small-Cap Revenues by Region

Source: MSCI, data as of March 31, 2021. "EMEA" includes all countries classified as developed markets in Europe and the Middle East. "Other" includes all countries classified as frontier or standalone markets.

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