Investors keen to diversify away from US mega cap stocks and avoid the worst of the current volatility in markets should look to global mid-caps, according to analysis by Aberdeen Asset Management.
For those who have a strong weighting in the US, global mid caps may well look attractive when thinking about the top stocks or funds to invest in to add diversification.
Global mid-caps, as defined by the MSCI World Mid-Cap Index, are less exposed to the US stock market than large caps. The MSCI World Mid-Cap Index has a 62% weighting towards the US, compared with 72% for the MSCI World Index.
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Anjli Shah, manager of the Aberdeen SICAV I - Global Mid-Cap Equity fund, says: “Globally mid-caps have long been overlooked and under-loved by investors. Still today there are only a handful of global funds that focus exclusively on this part of the market.
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“But, considering the diversification benefits they offer, now may be the time for investors to consider introducing a specific allocation to mid-caps into their portfolios.”
Ben Seagar-Scott, chief investment officer at Forvis Mazars, says investors who have a large chunk of their portfolio in equities should “definitely give some consideration to mid-cap stocks”.
“They are much more numerous than large cap stocks, presenting opportunities to find relatively undiscovered gems – meaning an area that active stock-pickers should be able to add real value in,” he says.
“It also provides a good route to diversifying away from mega-caps where valuations have been pretty expensive until fairly recently,” Seagar-Scott adds.
Though he cautions mid-caps do tend to have higher volatility than the larger cousins, and in areas where size matters and large companies can dominate “we often see expected earnings growth have been somewhat lower”.
Are mid-caps cheap?
Medium-sized companies are trading at their lowest valuations in years compared with large firms, and have sold off less severely than large or small-caps year-to-date.
Using data going back to 2009, fund house Aberdeen has found globally midcaps are trading at record low valuations compared with large firms.
This is despite the fact they have provided better returns than their larger peers over the past 25 years.
The data shows that over a 25-year period to 27 April 2025, the average growth of the MSCI World mid-cap Index was higher than for the MSCI World Large-Cap Index.
However, the average volatility for MSCI World Mid-Caps was lower than for MSCI Small-Caps.
The MSCI ACWI Mid-Cap Index consists of companies with a typical market capitalisation of $10bn to $40bn. This segment offers the potential for higher returns than large caps but with lower levels of risk than small caps.
Investors have pulled less money out of global mid-caps than both large and small-caps amid the current market sell-off. This could reflect the attractiveness of this “sweet spot” in the current market turmoil, according to Aberdeen.
Up to April 27, the cumulative return year-to-date for the MSCI World Mid-Cap Index was -0.47%, Aberdeen analysis of Morningstar data shows.
This was a smaller sell-off than those experienced by the MSCI World Index (-1.94%) and by the MSCI World Small-Cap Index (-4.10%).
Shah says: “For companies to have made it from small to mid-cap, they tend to have established and resilient business models while remaining nimble. Thus, mid-caps can potentially offer lower levels of risk than small-caps.”
Market inefficiencies – such as mid-caps being often under-researched and under-covered versus large-caps – present an opportunity for investors to find hidden gems, he adds.
“Investors buying in currently would be investing at a time of record low valuations relative to large-caps – which could be an attractive entry point,” says Shah.
Opportunities among UK mid-caps
Recent market turmoil and slowing global growth have renewed investor attention on the UK mid-cap sector, which, according to Aberdeen, offers superior earnings growth, a stronger domestic focus, and a persistent valuation gap relative to large caps.
See our article on ‘three mid-caps that could make attractive investments’ for more which mid-caps could be worth adding to your portfolio.
Rebecca Maclean, co-manager of the Dunedin Income Growth Investment Trust, says UK mid-caps provide distinct advantages over the FTSE 100, where earnings are predominantly generated overseas.
In contrast, 50% of FTSE 250 revenues come from the UK, making them more closely aligned with domestic economic trends.
“Historically, the UK mid-cap index has delivered stronger long-term earnings growth compared to their large cap peers. Projections suggest this trend will continue—with FTSE 250 earnings growth expected to outpace FTSE 100 going forward,” says Maclean.
Crucially for long-term investors, UK equities remain undervalued, and this is particularly evident in the mid-cap segment.
“The UK market is currently trading 20% below its long-term average price-to-earnings (p/e) ratio while the FTSE 250 is at a 20-year low in p/e discount relative to the FTSE 100,” Maclean says.
One in three wealth managers reduce exposure to US in Q1
Wealth managers are increasingly pessimistic about having exposure to the US.
The ARC Market Sentiment Survey, a quarterly poll of 78 investment management chief investment officers examining the 12-month outlook for the major asset classes and sectors, reveals a cautious tone, particularly with the US.
The geopolitical and macroeconomic backdrop shaped by the early months of President Trump’s return has led many firms to reassess exposure to US assets.
Sentiment was 4% net negative to US assets compared to 36% net positive a year ago.
While many investment firms made no changes, those that did primarily reduced US equity exposure, particularly in large caps and technology stocks, the survey found. Some increased exposure to US small and mid-caps.
James Cooke, deputy CIO at ARC, says: “This is the biggest negative sentiment quarter-on-quarter US swing we have seen since our market sentiment survey began in 2010.
“President Trump’s ‘Liberation Day’ tariffs threaten to damage sentiment further. Higher asset price volatility ought to provide opportunities for active managers to demonstrate the value they can provide.
“Those managers not making changes indicate they intend to look through the Trump-induced volatility believing tariff imposition may be temporary.”
