Small caps to outpace large in 2021
The combination of fiscal stimulus and pandemic stabilisation are likely to benefit global smaller companies as small caps are expected to see faster growth than their larger counterparts, according to American Century Investments.
While both small and large-cap companies were likely to post negative earnings per share growth this year, smaller companies were expected to rebound from this faster. In 2021, smaller companies were forecast to have stronger and more sustainable earnings growth and faster growth acceleration.
Many of the de-ratings that occurred in the March sell-off were already starting to re-rate on the back of improving fundamentals and transaction data.
Trevor Gurwich, senior portfolio manager of the Global Small Cap Equity fund at American Century Investments, said: “Signs of improvement or stabilisation in multiple countries is further supported by substantial fiscal stimulus measures. As a result, select companies that may have suffered during the crisis are now likely beneficiaries as economies reopen.
“Small caps historically lead the market during recovery periods. If you look at small-cap behaviour over time, they typically sell off more heading into recessions because investors consider them risky at the time, but often lead the market during recovery periods, supported by faster earnings growth.”
He said the fund was focused on finding companies which had sustainable and accelerating earnings growth, strong balance sheets, access to financing and the ability to survive revenue disruptions.
“It is the companies that have access to funding that will be able to survive the calamity of the COVID-19 pandemic. They will be able to more rapidly adapt to the changing times and either invest in areas where the competition has weakened or acquire companies at more attractive prices,” he said.
AUTHOR
Laura Dew
Recommended for you
Outflows from an Australian private markets fund manager have caused FUM at Pacific Current to decline by $1 billion in the last quarter.
Former RIAA chief executive Simon O’Connor has joined the ethical advisory panel at U Ethical Investors.
Financial services leaders are “all cashed up with nowhere to grow” when it comes to M&A activity, according to Deloitte, with 90 per cent saying they have strong balance sheets ready for an acquisition.
As fund managers are urged to diversify their product ranges, they are finding a faster way to do this is via an acquisition of existing firms but experts say it is not without potential culture clashes.
