Will US small caps perform better than large caps when rates rise?

Mark Sherlock, lead portfolio manager of Hermes US SMID Equity fund, analyses which market cap is likely to perform best when the Federal Reserve finally decides to raise rates

Last summer, we ran analysis which showed that the high quality end of the market had significantly underperformed low quality over the last five years as excess liquidity pushed up higher leveraged and speculative assets. As liquidity is withdrawn so high, quality should begin to outperform. Further, we observed high-quality US small- and mid-cap companies are attractively valued, with greater exposure to the domestic US economy, and tend to outperform when rates rise. With respect to monetary tightening, it is likely any normalisation of interest rates will be very gradual, given Ja...