BAM: For 2021 small-cap opportunities, look global
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For opportunities in small to mid-cap stocks, look global.
That’s the view of boutique equities manager Bell Asset Management (BAM), which this week released its 2021 markets outlook.
Speaking at a recent presentation, chief investment officer Ned Bell said that historically, major market dislocations have created the ideal opportunity to allocate capital at the smaller end of town.
He cited the long term trend in global earnings following the 2000 dot.com crash and the 2008 financial crisis (GFC).
Both bear markets resulted in earnings crashes of more than 40 per cent. And for the GFC in particular, it look a long time for earnings to rebound.
Conversely, the global small and mid cap (SMID) sector chalked up a “phenomenal performance” in both rebounds, Bell said.
Five years on from each crisis, “in absolute US dollar terms, just by allocating to global SMID equities, investors would have received a return of 221 per cent and 231 per cent after each respective crisis”, he said.
In addition, while the 2020 post-Covid bull market has provided tailwinds for all sectors, the global SMID index is still only trading at December 2018 levels.
In fact, small-cap performance has lagged the MSCI World Index (which captures large-cap representation across 23 developed markets) by 4.1 per cent annually over the last three years.
That means that as earnings normalise and economic activity picks up in the COVID-19 recovery, the sector represents a compelling medium-term investment opportunity.
“The combination of corporate cost cutting, COVID-19 related stimulus, and the reopening of global economies positions global SMID equities for an exceptionally strong rebound over the next 2-3 years,” Bell said.
Bell added that while big tech names have benefitted from the COVID-19 economy, the pandemic has also “pulled earnings for these companies forward, meaning we will see risks arise when growth starts to moderate”.
In terms of small cap opportunities, Bell’s focus is on the US market.
He likes lawnmower and gardening company Toro (NYSE:TTC), pool distribution company Pool Corp (NASDAQ:POOL), confectionary business Hershey’s (NYSE:HSY), and supermarket chain Kroger (NYSE:KR).
In addition, Bell doesn’t expect to see a fast snapback in pandemic-hit sectors such global travel in 2021.
Rather, there is “longevity in pandemic themes like working from home”.
In that context he also cited the Hong Kong-listed power tools company Techtronic Industries (TTI), as a company which offers investors a “different flavour of growth” to large cap names.
“We are paying close attention to the shape of the economic and earnings recovery and believe global SMID is well positioned to take advantage of a post COVID-19 world,” Bell said.