The equities team at Wells Fargo is planning to pivot into US small caps
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The next six to 12 months will offer a good opportunity to pivot into US small caps, says Chris Harvey — head of equity strategy at Wells Fargo Securities.
In an interview on Friday with CNBC’s Fast Money program, Harvey highlighted two main reasons for his view.
Firstly, he said the outlook for small caps was more positively correlated to falling infection rates and declines in the risk posed by COVID-19.
And secondly, he’s looking for “easy ‘comps'” heading into the first half of next year. In other words, stocks that have a good chance to outperform in comparison (comps) to H1 2020, when earnings got battered by the pandemic.
“You can find all of that in small caps,” Harvey said. “Our price target for the S&P500 was 3,388, and we’re sitting right on top of that now.”
“So we’re not ready to leave the party just yet, but we’re looking for rotation and areas where we can grab cyclicality.
“It’s a ‘walk not run’ type situation. We want to rotate, but do it in a slow and methodical fashion. Because we think in 12 months we’re going to be in a better place with regard to the economy.”
In saying that, Harvey acknowledged the lingering risks posed by the virus and uncertainty about how that would play out.
But in the event of a downside surprise on the health side, he said all stocks would be negatively affected — not just small caps.
“Can it (COVID-19) get worse? Absolutely it can get worse. But I think everyday we get one day closer to a vaccination,” he said.
“And in addition to that, where we want to go is the easy ‘comps’ — places where numbers were slashed at the start of this year, and you don’t need much of an economic improvement to see an upward trend.
“That’s right across small caps, it’s across cyclicals and more of the contrarian plays that haven’t been picked over just yet.”
Harvey said the current paradigm, where large (or ‘uber’) stocks such as Apple and Tesla continue to outperform the market, may continue to run for a while.
But that will ultimately create a good environment for selective rotation over the next year or so.
“We’ve seen these more excessive tops, where froth starts to come into the marketplace and what’s working continues to work. But that’s not good value,” he said.
“If we’re looking ahead six to 12 months, we want to go where the market’s going to go. And the market is eventually going to start rotating to some of those economically sensitive names.
“In the meantime, ‘uber’ caps are still working today but if you look at the small caps index in the second half of this year, it’s more or less trading in line with the S&P500 and that’s a positive sign.”