Size does not matter for the time being

Taking the long-term development of small caps versus large caps into consideration shows that there is a strong relationship with the general equity market development. Small caps outperform when equity markets are rising and vice versa. Based on the recent development in equity markets and more difficult near-term outlook, we neutralised our size-related calls. This can be largely explained by the changing risk-taking propensity of investors. With the generally changing mood in recent weeks, investors want to take less risk again which becomes more visible in various measures.

As a result, global large caps started to outperform small caps in the second quarter of this year. Looking at most recent performance data, it is however not yet clear to us whether this is already a full-blown trend change or just a consolidation phase. As we would like to get more visibility first, we have changed the rating to neutral for various size categories for the time being.

Conclusion

Given the current uncertain environment for equities, we are becoming less biased. We neutralised our global calls on small, mid and large caps.

July consumer price index (CPI) inflation data for the UK, to be presented later today, will hardly be a motivation for the Bank of England (BoE) to indicate more clearly the beginning of interest-rate normalisation. Despite a very robust growth backdrop, consumer prices are expected to have softened to 1.8% y/y, with a core rate at a similar level of 1.9% y/y. Policy makers of the Bank of England hence can still enjoy the support from benign inflation numbers, as the strong recovery of the past quarters has not yet reduced economic slack significantly to broadly increase price pressure. The challenge for the BoE remains to time precisely when slack has been eliminated by the recovery and when inflation risks begin to rise.

Conclusion:

Today’s inflation readings will most likely confirm the BoE’s Hold stance, and will add more urgency to early interest-rate hikes only in case of an upside surprise. Of interest will also be Wednesday’s BoE minutes, which will unveil whether some members of the Monetary Policy Committee have already opted for interest-rate hikes.