Small-cap value resilient amidst escalating tensions in the Middle East

Markets stabilise after US and Israeli strikes  

On June 13, just hours after the International Atomic Energy Agency (IAEA) reported that Iran was no longer honouring its commitment to cooperate with the international nuclear inspectors, Israel’s air force carried out targeted strikes on Iran’s nuclear facilities. In retaliation, Iran launched multiple salvos of ballistic missiles at Israel leading to both sides reporting fatalities and major infrastructural damage. After several days of speculation over whether the Trump administration would intervene, the rapid escalation of military engagements eventually led to a U.S. military response.

On June 23, the U.S. military launched airstrikes on Iran’s nuclear facilities deploying advanced ‘bunker-busting’ weaponry not available to the Israelis. This resulted in Iran retaliating on June 24 by attacking a U.S. military base in Qatar, although this time with very limited impact due to the Iranian regime telegraphing in advance the details of the attack and the relatively minimal armaments at Iran’s disposal. The world was poised for further military developments, but relief was felt when later on the same day, U.S. President Trump posted on social media that Israel and Iran had ‘agreed to a complete and comprehensive ceasefire.’ Both Israel and Iran indicated their willingness to accept the ceasefire, leading to the cessation of attacks and the international community began to digest the tumultuous events of the past few days. Summarizing movements in the markets during the period of hostilities from June 12 to 20, we can note that as seen in the table below:

• crude oil prices surged
• major stock indices in Europe and the U.S. declined
• the 10-year government bond yields rose as money flowed into so-called safe-haven asset classes.

In the foreign exchange market, the U.S. dollar appreciated significantly against major currencies showing that many investors still view the dollar as a safe bet in times of market stress. The Japanese yen depreciated, resulting in a stronger dollar and a weaker yen. This may have been welcome news to some Japanese-focused investors, as traditionally the weaker yen has been seen as beneficial for the export-oriented parts of corporate Japan.

Key asset classes and how they responded to the crisis

Note: The data is from June 12 to 20, 2025. The changes in government bond yields and the USD/JPY exchange rate are measured in terms of range, while the changes in Brent crude oil futures and WTI crude oil futures are measured in terms of rate of change.
Source: Prepared by Sumitomo Mitsui DS Asset Management based on Bloomberg data.

Semiconductor-related stocks lead the rally

Symbolising the relatively muted nature of the market response, in Japan the TOPIX declined but the Nikkei rose. The Nikkei increased by 230.14 in yen terms, with major contributors including Advantest and SoftBank Group. Advantest’s positive contribution amounted to an impressive 406.60 yen as can be seen in the table below. 

On the other hand, stocks with significant negative contributions included Tokyo Electron and Fast Retailing, with Tokyo Electron’s negative contribution registering as 101.28 yen.

Movements in the Japanese Market

Note: The data is from June 12 to 20, 2025. For individual stocks, the top three stocks with the largest positive and negative contributions. For the 33 industries of the Tokyo Stock Exchange, the top three industries with the highest rates of increase and decrease.
Source: Prepared by Sumitomo Mitsui DS Asset Management based on Bloomberg 

Although not all semiconductor-related stocks rose, the Nikkei tends to be strongly influenced by movements in its cohort of high-priced stocks. Recently, the high-priced movers were semiconductor names.

Digging a little bit deeper and looking at the 33 sector indices of the Tokyo Stock Exchange, other top performers alongside semi-conductor-related stocks included ‘Other Products.’ This amorphous category includes companies like Nintendo and Bandai Namco Holdings, and sectors such as ‘Electric Power and Gas’ and ‘Mining’ also recording strong performance due to the prevalence of value names in these sectors. The sectors with the highest rates of decline were ‘Pharmaceuticals,’ ‘Steel,’ and ‘Air Transportation.’

Small-cap value shines amidst the turmoil

Perhaps predictably given the risk-averse mood during the military exchanges, small- and mid-cap names with more exposure to domestic revenue sources than their large-cap counterparts held up relatively better. Within this market-cap range, value likewise performed better than growth, and investors might now view this pattern as a guide for navigating the financial impact of any future Middle East crises.

This pattern emerges most clearly when analyzsng style indices. Mid/Small-cap stocks as captured by the TOPIX MID 400 and TOPIX SMALL Index outperformed the large-cap stocks of the TOPIX 100 Index, and the performance of the TOPIX Value Index likewise trumped the TOPIX Growth Index. 

Furthermore, while the Nikkei Average Domestic Demand Stock 50 Index rose, the Nikkei Average External Demand Stock Index declined, indicating an investor preference for domestically focused stocks during the period of heightened geopolitical tensions.

Where are we now?

Following the reported ceasefire agreement from June 20 to 24 crude oil prices fell back, European and U.S. stocks rebounded, and the U.S. dollar was predominantly sold against major currencies. 

In the Japanese market, there was a tendency for some buying back of previously sold growth stocks, as well as a reversion to previous levels in the industry and style indices. If the Middle East situation deteriorates again, our view is that the developments described above could provide a clear reference point about what to expect next time. 

Additionally, in an era of generally heightened global tensions, we cannot expect a long period of calm before the next crisis emerges. However, the specific causes and nature of any future crises would naturally also need to be factored in. 

However, we see the resilience of small- and mid-cap value names as a key takeaway from this recent bout of turbulence, and we expect small-cap value to continue to show its virtues when headlines cause large-cap growth stocks to wobble.

Note: While individual stocks are mentioned, this does not constitute a
recommendation for these stocks.