Small caps, value stocks, and emerging markets are three areas to watch as the creation of two successful COVID-19 vaccines hastens the return to normality.
Research by Bank of America found allocations to small caps had seen a ‘big jump’ in allocations and an ‘unambiguous rotation’ from large cap into small caps as 21% of respondents thought they would outperform large ones in 2021.
There had also been growth in allocations to emerging markets, which was the asset class respondents most expected to outperform in 2021, and in value stocks away from growth ones.
According to FE Analytics, over one year to 30 October, 2020, the Australian small-cap sector had returned 5.3% versus losses of 5% by the wider Australian equity sector. Meanwhile, emerging market funds had performed in line with global equities with both sectors seeing returns of 2% over the same period.
Seema Shah, chief strategist at Principal Global Investors, said: “Visibility towards a return to normality is increasing and this should provide more fuel to the reflation rally with small caps, value and cyclicals clear beneficiaries”.
Tan Hui, chief Asia market strategist at J.P. Morgan Asset Management, said: “Equity sector rotation could dominate investor discussion in coming months and we think investors can look to diversify their allocations to take advantage of potential good news on vaccine development in sectors that have underperformed in the past six months.
“By region, this suggests using the US, Asia and China as core allocations for an equity portfolio, and gradually adding Europe, Japan and EM ex-Asia to take advantage of their attractive valuations.”
Sebastien Page, head of global multi-asset at T. Rowe Price, said: “Thus far the areas of the market that performed best leading into the pandemic also outperformed during the pandemic. Growth led value, large caps led small caps, and the US led international.
“This equity market divergence is due to high levels of concern about businesses with higher leverage, higher sensitivity to economic growth, and an expectation that interest rates will remain very low for the foreseeable future.
“Within asset allocation, we are closely monitoring the potential for a great rotation from growth to value. We believe investors should remain diversified between growth and value. Looking ahead at 2021, we feel investors should look to take advantage of cheap cyclicality (on a relative basis) in small caps, high yield, and emerging markets.”
