Contrary to popular belief, out of the world's small cap markets, Japan appears to hold the most promise, with the US still offering fair amounts of opportunity and Europe and Latin America showing potential in areas but only for the experienced market follower.

The Japanese economy needs to gather strength following the Asian crisis last year, but small caps are already showing a good deal of value. The HSBC James Capel smaller companies index has risen 20% from the beginning of the year and looks set to rise further. Andrew Couch, fund manager at Guinness Flight Hambro in London is convinced Japan is nothing short of a once in a lifetime opportunity" and expects the sector to triple over the next two to three years, "once the recovery kicks in". The Japanese ministry of finance is expected to deliver at least one fiscal package this year to boot the economy and to try and stimulate domestic demand, which has particular relevance for the smaller companies. But invest-ors need to move now, to take full advantage of the goods on offer. "On a strategic basis, if you believe the Japanese economy is going to recover ever, the floor valuations that we were looking at would indicate that this is a very good time to go into the Japanese small companies market," says Couch.

While the US may not offer such exciting opportunities, its prospects for growth this year are still fairly good for investors wanting to access the US small caps market, though it differs between growth and value stocks if 1997 is anything to go by. Last year small value stocks rose 31% while the small growth stocks were only up by 12.9%. The US also looks set to be a first stop for in-vestors who have been stung by the emerging markets and Asia and may turn to small caps which have been less impacted by the Asian decline and who are still showing good earnings growth potential.

Currently small caps are attractively valued in comparison to large caps as the large caps have outperformed the index over the last couple of years and have become rather expensive. Purely from a valuation standpoint, small caps appear to be a better bet, but this is only if the economy carries on doing well, as Todd Rupert, managing director at T Rowe Price in Baltimore points out: "If the whole market gets crushed by what's going on in Asia, the smaller companies might perform poorly as well".

As such, in a flat to rising market small caps stand a fair chance of outperforming large caps as the rising dollar will affect large cap earnings as will the Asian crisis. But investors should take heed of a falling market, as small caps may be dragged down by their own volatile nature reducing the likelihood of outshining their large cap peers.

Mexico is still the darling of Latin America and investors may be able to achieve returns of upto 15-20% on their small cap investments this year, which is largely a knock on effect from the US market's "goldilocks scenario", says Victor Galliano, BBV Latinvest in London. "The Mexicans have had quite a lot of success in terms of the consumer coming back into the market after the crisis, and in terms of the recapitalisation of the banking system with foreign banks coming in," he says. Peru also seems to be faring well, but other than those two markets, the opportunities in Latin America appear limited.

Brazil is in a "difficult situation economically," with very high interest rates in place to try and cool down imports and keep the currency strong; Argentina is also experiencing a tough time with the economy slowing down and also being heavily reliant on Brazil; Chilean small caps look set to have a difficult year with interest rates and overnight rates rising to the 8.5% mark in

real terms; and Columbia and Venezuela are "not out of the woods yet," warns Galliano. Venezuela is still experiencing some 'currency wobbles' and in both markets the opportunities to find smaller companies are limited even in a healthier economic climate. Rachel Oliver"