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Inflation danger for small stocks

Small caps have had a great run recently, but this will end if investors start to seriously worry about inflation
Inflation danger for small stocks

Do smaller stocks protect us from inflation? This is the question posed by the fact that the FTSE small cap index has risen by over 60 per cent since September at the same time as inflation expectations have risen. In fact, so great has been the rally in small stocks that they are now at their highest level since 1989 relative to the FTSE 100.

There’s plenty of precedent for small caps doing well when inflation expectations rise. The same thing happened in 2009-10 and in 2013 for example. And, conversely, falling inflation expectations in 1991-92, 1999 and 2008-09 also saw small caps do badly. Small caps have also tended to do well not just when the gilt market’s inflation expectations rise but when commodity prices do so as well.

We should not, however, infer from this that small caps are a good protector from the threat of inflation.

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