SMALL caps are the latest glamour stocks, but some analysts warn they might not be the wisest choice for the small punter. Reports have appeared around the globe recently suggesting that fast, flexible small-capitalisation stocks are poised to outperform their stodgy blue-chip brethren - particularly in this region, where economies are seen picking up steam in coming months. 'Smaller Asian companies are a more attractive investment than blue chips at present,' Guinness Flight Asia's investment director, Nerissa Lee, told an audience of fund managers, financial advisers and private investors in San Francisco last month. Small caps were cheaply priced and promised good performance, she said. On a weighted average basis, smaller companies in Hong Kong, Indonesia, Malaysia, the Philippines, Singapore and Thailand had a price-earnings ratio of 15.3 in 1996 compared with 17.7 for larger companies. Looking forward, smaller companies' earnings per share (EPS) were expected to grow by 27 per cent in 1997 compared with only 16 per cent for larger companies, she said. Ms Lee favoured small caps in China, Hong Kong, the Philippines and Thailand and was particularly bullish on consumer and infrastructure-related counters. But as with most bargains, it is important to look long and hard before buying. 'You do have to be a little bit careful,' warned Peter Churchouse, Morgan Stanley Asia's managing director of research. 'Disclosure is worse, managements are not known so well, balance sheets are often a little more fragile, and there's just that much more uncertainty about them.' In a recent research report, he concluded investors in Asia would be better off sticking with larger-cap stocks. He added, however, that Hong Kong investors searching for growth would be able to forage among smaller caps without seriously compromising liquidity. Mr Churchouse dissected EPS figures from around the region, the same type of data used by Ms Lee, and uncovered a complicated investment landscape, with opportunities varying dramatically by market. In Hong Kong, for example, the top 30 or so stocks posted an average EPS growth of about 14 per cent in 1995. But when all listed companies were examined together, EPS actually shrank by 2 per cent. Malaysia presented a rather different picture, with growth concentrated more among smaller caps. Aggregate earnings growth, which was basically flat among stocks accounting for the top quarter of the market's capitalisation, jumped to 17 per cent when the sample was extended to about 100 companies. Mr Churchouse did not conclude from these findings that one should invest in Malaysian small caps in preference to their Hong Kong counterparts, however. The size and liquidity of each market's 'investable' universe was a crucial consideration, and Hong Kong came out much better than Malaysia on that score, he said. Small Hong Kong companies tended to have larger market capitalisations, better liquidity and more widely known managements than small Malaysian companies. The small scale and unknown character of many Malaysian stocks meant their share prices were more easily manipulated, he warned, with investor groups able to ramp them up and then bail out at the top of the market. One might be tempted to think a savvy fund manager would allow the small investor to avoid such pitfalls. No such luck, Mr Churchouse said. 'The fund managers are just as much at its mercy as anybody else,' he warned.