Loding Loading ...
X
Century Financial Consultancy LLC ("Century") does not offer investment advisory or portfolio management services nor guarantees investment returns. We do not accept or make payments in cryptocurrency or digital currency. Our official website is www.century.ae. Beware of fraudulent companies or websites posing as Century. We are not responsible for any losses from using fake websites or entities. Trading in financial markets involves a significant risk of loss which can exceed deposits and may not be suitable for all investors. Before you start, please ensure you fully understand the risks involved.
  • AR AR
Century Financial Consultancy
Back

Monday, February 10, 2025

Tech-Tonic Shifts: Riding the Small Cap Wave

By Century Financial in 'Investment Insights'

Tech-Tonic Shifts: Riding the Small Cap Wave
Coldplay

In Layman Terms

  • This strategy explains a pair trade between Russell 2000 (Small Cap 2000) and Nasdaq 100 by taking a long position on Small Cap 2000 and a short position on Nasdaq 100 of the same size.
  • Small Cap 2000 has strong 2025 earnings estimate growth of 46% compared to 21% for Nasdaq 100.
  • Small Cap 2000 companies are more focused on the local (U.S.) market and would be less impacted by tariff threats, unlike large-cap companies.
  • Nasdaq 100 to face some headwinds from the recent disruption by DeepSeek, which has raised doubts about the high valuations of AI stocks.

Small Cap 2000/Nasdaq 100 Price Ratio Chart

Source: Bloomberg | Date: 29th January 2025 | Red line: Resistance | White line: Support

Rationale

Small Cap 2000 Index

Interest Rates & Small-Cap Advantage:

  • The Federal Reserve started cutting interest rates in 2024, which helps small companies.
  • Over 40% of small-cap companies have floating-rate debt, so lower interest rates mean they can borrow more cheaply.
  • Lower rates could also make small-cap stocks valuations more attractive and increase mergers & acquisitions (M&A) activity.

Economic Growth & Profitability:

  • The U.S. economy is expected to grow at a robust rate in 2025, which helps smaller companies boost their revenue and margins. Despite the possibility that rates could stay high this year, strong profitability could offset the higher cost of debt servicing for smaller companies.
  • Earnings for small-cap companies have started showing signs of improvement and are expected to grow faster than Nasdaq 100 companies (about 46% vs 21% in 2025).

Policy Changes Under Trump:

  • Trump's proposed tax cuts from 21% to 15% and changes in financial regulation could benefit small companies, especially in industries like Finance, Biotechnology, and Energy (which make up 32% of small-cap stocks).

Outlook:

  • With lower interest rates, tax cuts, and strong earnings growth, small-cap stocks could perform better than the broader market and may push the Russell 2000 index higher than its 2024 high of $2,471.

Nasdaq 100:

Nasdaq 100 Performance:

  • The Nasdaq 100, which tracks the top 100 non-financial companies, grew 22% over the past year, mainly driven by the success of the “MAG 7” stocks (big AI companies).
  • Markets were in a state of euphoria as the AI rally seemed robust and unstoppable.

Disruption by DeepSeek:

  • On January 27, 2025, a Chinese startup called DeepSeek launched a new AI model, R1.
  • DeepSeek built the model in just 2 months, costing only $6 million with a small team of fewer than 200 people. In comparison, OpenAI’s GPT-4 model cost over $100 million to develop.
  • DeepSeek's R1 model has shown performance that rivals or exceeds top American AI models, even using lower-spec Nvidia H800 chips due to US restrictions on China’s access to high-end AI hardware.

Market Reaction:

  • The news caused a negative reaction in the tech sector, with the Nasdaq 100 dropping by about 3% on January 27, 2025, and Nvidia’s stock falling by around 17%.
  • There’s now concern that DeepSeek’s success could disrupt the current AI business model, which relies on expensive, high-end chips and massive computing power.

Impact on AI Stocks:

  • The development raises doubts about the high valuations of AI stocks, especially hardware companies like Nvidia.
  • Markets are now likely to price in lower bookings, revenues, margins, and earnings for these companies, ultimately bringing down their valuations and attractiveness.

Scenario Analysis without Leverage

On a position size of $1 million without leverage, the investor takes a long position of $500K on the Small Cap 2000 index and an equivalent short position of $500K on the Nasdaq 100 index. Breaking this down further, if the ratio increases to 0.1153, the investor could make a profit of $43,000. However, if the ratio falls to 0.1037, the investors could potentially incur a loss of $12,750.


Scenario Analysis with Leverage

On a position size of $2 million (2x leverage), the investor takes a long position of $1 million on the Small Cap 2000 index and an equivalent $1 million short position on the Nasdaq 100 index. Breaking this down further, if the ratio increases to 0.1153, the investor could make a profit of $86,000. However, if the ratio falls to 0.1037, the investors could potentially incur a loss of $25,500.

Risks and Assumptions

  • Holding costs and other transaction costs have not been considered in the above calculations.
  • It is essential to carefully read the complete disclaimer before implementing the strategy.
  • Trading pairs is not a risk-free strategy and carries inherent risks.
  • The strategy can result in losses if the prices of the two commodities move contrary to the positions taken.
  • Adhering to strict risk management rules is crucial to mitigate potential adverse outcomes

Disclaimer:Century Financial Consultancy LLC (CFC) is duly licensed and regulated by the Securities and Commodities Authority of UAE (SCA) under license numbers 20200000028, 20200000081 and 301044 to practice the activities of Trading broker in the international markets, Trading broker of the OTC derivatives and currencies in the spot market, Introduction, Financial Consultation and Financial Analysis, and Promotion. CFC is a Limited Liability Company incorporated under the laws of UAE and registered with the Department of Economic Development of Dubai (registration number 768189). CFC has its registered office at 601, Level 6, Building no. 4, Emaar Square, Downtown, Dubai, UAE, PO Box 65777.

PLEASE READ THE FOLLOWING TERMS AND CONDITIONS OF ACCESS FOR THE PUBLICATION BEFORE THE USE THEREOF.

Please carefully read the terms and conditions before using the Publication (which means and includes this document/flyer, charts, diagrams, illustrations, images, and all of its contents) ("Publication"). By accessing and continuing to use the Publication, you acknowledge and accept the terms and conditions outlined in this Disclaimer ("Disclaimer"). CFC holds the right to modify or update the Publication and the Disclaimer at any time without any prior notice. Your access and usage of the Publication post the modifications or updates to the Disclaimer will constitute your agreement to abide by the revised terms and conditions. If you do not agree with the contents of this Disclaimer please refrain from using the Publication. Any terms and conditions you propose that may contradict this Disclaimer are liable to be rejected by CFC and shall be considered null and void.

This Publication is a marketing material. It has not been prepared in accordance with legal requirements intended to promote the independence of investment research and, therefore, is a straightforward marketing communication. This Publication's opinions, news, research, analysis, prices, and other information comprise a general market commentary and do not represent the opinion or advice of CFC or any form of personalized or investment advice. Accordingly, CFC is not liable for any loss or damage, including but not limited to any loss of profit, that may arise directly or indirectly from using or relying on this Publication.

The information in this Publication cannot disclose everything about the nature and risks of the abovementioned data/information. Therefore, this is not an exhaustive list of the risks involved. Please refer to our website for the complete Risk Disclosure Statement.

Charts, graphs, tables, calculations of profit and loss, leverage, scenario analysis, other numbers and calculations and related data or information provided in this Publication are intended for illustrative purposes only. The information contained in this Publication is prepared as of a particular date and time and will not reflect subsequent changes in the market or any other factors relevant to their determination. All statements as to future matters are not guaranteed to be accurate. CFC disclaims any obligation to amend or revise any forward-looking statements to reflect new information, events, or circumstances after the date of this Publication or to reflect the occurrence of unanticipated events. The Publication may contain forward-looking statements and projections based on current market conditions and an assessment of future trends. Actual results may differ materially from those projected. CFC does not guarantee the accuracy or reliability of any such statements.

No information given in this Publication should be construed as an endorsement of any particular security, company, or industry, offer, recommendation, or solicitation to purchase or dispose of any securities/financial instruments/products or to enter into any transaction or adopt any hedging, trading or investment strategy. The data/information contained in the Publication is not designed to initiate or conclude any transaction. Neither this Publication nor anything contained herein shall form the basis of any contract or commitment whatsoever. Distribution of this Publication does not oblige CFC to enter into any transaction.

The Publication should not be considered legal, regulatory, credit, tax, or accounting advice. Anyone proposing to rely on or use the information contained in the Publication should independently verify and check its accuracy, completeness, reliability, and suitability and obtain independent professional advice. The Publication does not take into account the investment objectives, financial situations, and specific needs of recipients. The recipient of this Publication must make independent decisions regarding whether this communication and any securities or financial instruments mentioned herein are appropriate in the light of their investment objectives, investment experience, financial situation, existing portfolio holdings and/or investment needs. Recipients will need to decide on their own as to whether or not the contents of this Publication are suitable for them.

Information contained in this Publication is based on various sources, including but not limited to public information, annual reports, and statistical data that CFC believes to be reliable. However, CFC makes no representation or warranty as to the accuracy or completeness of any report or statistical data made in or in connection with this Publication and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in this Publication. In addition, the names used to describe various financial products or instruments in this Publication may vary from the ones used on different trading platforms.

All views expressed in all reports, analysis and documents are subject to change without notice. CFC may have issued other reports, analysis, or other documents expressing different views from this Publication. In addition, staff members/employees of CFC may provide/present oral or written market commentary or analysis to you that reflect opinions contrary to the opinions expressed in this research and may contain insights and reports inconsistent with the views expressed in this Publication. Neither CFC nor any of its affiliates, group companies, directors, employees, agents, or representatives assume any liability, nor shall they be made liable for any damages, whether direct, indirect, special, or consequential, including loss of revenue or profits that may arise from or in connection with the use of the information provided in this Publication.

Information or data provided by means in this Publication may have many inherent limitations, like module errors or lack of accuracy in its historical data. In addition, data included in the Publication may rely on models that do not reflect or consider all potentially significant factors such as market risk, liquidity risk, interest risk, credit risk etc.

CFC and its affiliates reserve the right to act upon or use the contents hereof at any time. The use of our information, products and services should be on your own due diligence and you agree that CFC is not liable for any failure to achieve the desired return on investment that is in any manner related to availing of services or products of CFC and use of our information, products and services. You acknowledge and agree that past investment performance is not indicative of the future performance results of any investment and that the information contained in this Publication is not to be used as an indication for the future performance of any investment activity. Any prices provided in this Publication are indicative only and do not represent firm quotes as to either price or size.

This Publication is being furnished to you solely for your information and neither it nor any part of it may be used, forwarded, disclosed, distributed or delivered to anyone else. You may not copy, reproduce, display, modify or create derivative works from any data or information contained in this Publication. This document may not be published, circulated, reproduced, or distributed in whole or part to any other person (whether within or in a jurisdiction outside UAE) without the prior written consent of CFC.

Declaration of the Financial Analyst: The Analyst(s) who prepared this report certifies that the opinions contained herein exclusively reflect his or her views. The Analyst further undertakes that he or she has taken reasonable care to maintain independence and objectivity in respect of the opinions herein. The Analyst(s) who wrote this report does not hold securities in the Company mentioned in the report (“Company”). The Analyst(s) confirms that he or she and his / her Associates do not serve as directors or officers of the Company, and the Company or other third parties have not provided or agreed to provide any compensation or other benefits to the Analyst(s) in connection with this report. An “Associate” is defined as the spouse, parent or step-parent, or any minor child (natural or adopted) or minor step-child of the Analyst. The Analyst(s) receives a fixed compensation from CFC. No part of his or her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this report. The business solicitation or marketing departments of CFC are separate and independent from the reporting line of the Analyst(s).

Trading in financial products carries risk. Trading in leveraged Over-The-Counter (OTC) Derivative products including Contracts for Difference (CFDs) and spot foreign exchange contracts involves a significant risk of loss which can exceed deposits and may not be suitable for all investors. OTC Derivative products / CFDs are complex financial instruments that do not confer any claim or right to the underlying financial instrument. Transactions in these instruments are very risky, and you should trade only with the capital you can afford to lose. Before deciding to trade on these products, you should consider your investment objectives, risk tolerance, and your level of experience. Accordingly, you should ensure that you understand the risks involved and seek independent advice from professionals, if necessary.

View More