The two areas benefiting from inflation
While there are fears of inflation being “stickier” than expected, this is presenting opportunities in small caps and in value stocks, according to American Century.
Market consensus expected inflation to be transitory but there was a risk that inflation could be “stickier” than expected and further details would be given at the Federal Reserve’s Jackson Hole symposium which would take place on 27 August.
This would detail how the Fed intended to deal with inflation and any changes to future interest rates or quantitative easing policies.
However, if inflation proved to be “stickier” than transitory expectations suggested, this could still present opportunities in certain areas of the market.
Rich Weiss, American Century Investments chief investment officer – multi-asset strategies, said: “Small-cap stocks look appealing relative to large-cap equities because small-company stocks tend to be more domestically focused and more economically sensitive.
“Consider that large companies may operate in many geographies, products and markets, making them typically more resilient during a downturn, but relatively less attractive at a time when the US is recovering much faster than the rest of the world.”
According to FE Analytics, within the Australian Core Strategies universe, the Australian small and mid-cap sector returned 33.1% over one year to 25 August while the global small and mid-cap sector returned 38.4%.
In both categories, the returns were larger than their large-cap counterparts with the Australian equity sector returning 26.8% and the global equity sector returning 28%.
Weiss said he preferred small-cap stocks over large ones, particularly in the US, as there was stronger US growth relative to non-US economies which benefitted small caps as they had greater exposure to domestic growth.
Other opportunities arose in economically-sensitive value stocks like banks where more loans, transactions and higher borrower credit quality were advantageous. They were further helped by the likelihood of interest rates rising again in the future and a steeper yield curve.
“We believe the economic recovery that’s driving the rotation from growth to value still has plenty of room to run,” Weiss said.
Out of big four banks, the best-performer over the past year to 25 August had been ANZ which returned 58% followed by NAB which returned 57%, while the ASX 200 returned 25.5%. Three out of the big four banks had initiated shareholder buybacks.
AUTHOR
Laura Dew
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