For this $US1.2 trillion fund manager, it’s small caps over large caps in 2021
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Small caps beat large caps, and bullish Australia.
Those are two of the main insights from the January markets report by the Aussie investment division of $US1.2 trillion fund manager T.Rowe Price.
The analysts, led by head of Australian Equities Randal Jenneke, also flagged possible signs of excess in US shares in the wake of the post-Covid bull market.
Despite the huge March selloff, the S&P500 ended up posting a 16 per cent gain last year.
In turn, that pushed valuations to levels “not seen since the (2000) tech bubble”, the analysts said.
“Going into 2021, investors don’t seem fazed that these signs of excess could be foreshadowing a replay of 2000, and companies seeking to go public don’t appear to be slowing down anytime soon,” they noted.
Indeed, there are no signs the key macro factors underpinning the 2020 rally (in the form of unprecedented monetary and fiscal support) are going to change this year.
Central banks aren’t planning to switch gears, while the incoming Biden administration has flagged a willingness to spend big on the fiscal side.
And in the event that economies begin emerging from the worst of the health crisis with plenty of policy support behind them, small caps could be positioned to benefit.
“Smaller companies should benefit most from unleashed pent-up demand and fiscal stimulus. Valuations less challenging than large-caps and continue to offer potential upside to economic recovery,” T.Rowe Price says.
Conversely, “larger companies face challenging valuations, particularly in tech, and could lag as recovery advances”.
Turning to the Australian market, the analysts were more confident in the tailwinds behind the domestic economy’s emergence from the pandemic.
Success in eradicating the virus means the economy is likely to be less dependent on a vaccine to open back up, they said.
In that context, “earnings forecasts appear to underestimate the speed of Australia’s economic recovery”.
“The domestic backdrop is supportive with accommodative policies and lots of pent-up demand.”
On a global level, the T.Rowe Price outlook is largely defined by the following conclusion: big US tech stocks are overvalued.
So instead of playing the post-Covid rebound via names such as Tesla and Amazon, more profitable returns lurk elsewhere.
“To benefit from the economic recovery, we rotate to more cyclical exposures, such as small cap, value and EM (emerging market) stocks,” the analysts said.