The outlook for smaller US companies looks positive for 2003 but is dependent on the continued grow...
The outlook for smaller US companies looks positive for 2003 but is dependent on the continued growth of the economy and the resolution of political uncertainty over Iraq.
Gartmore senior investment manager Nick Ford says investors have become more comfortable with mid caps in recent years, which has led to outperformance over large caps and could help shepherd investment into the small-cap sector.
Smaller companies are more geared to changes in economic activity, he adds, providing greater scope for a positive turnaround during times of economic uncertainty and maximising the benefits of any upturn in activity.
Ford says: 'We remain positive on small caps versus large caps in 2003. The sector has outperformed over the past few years and we think this will continue.'
He adds the economy is coming out of a recession, which has historically benefited smaller companies.
F&C US smaller companies manager Robert Siddles agrees US small cap stocks should have a better year in 2003 as shares traditionally do well in the third year of the presidential cycle.
Siddles says small stocks are often more volatile than large caps so offer opportunities for stockpickers to benefit from higher returns. But this can also increase investor risk so it is important to buy shares when they are cheap rather than chase share price momentum, he adds.
Elaine Crichton, head of US equities at Aegon, is more negative on the prospects for small-caps, believing investors should consider the impact a war with Iraq could have on the US economy. President Bush's proposal to cut double taxation on dividends could also have a negative impact on the market, she notes.
'The dividend proposal is not particularly helpful for small caps,' says Crichton. 'Smaller companies cannot afford to pay dividends and it will dampen the entrepreneurial spirit.
'It is tough for entrepreneurial companies because the whole issue of paying dividends is, broadly speaking, anti-growth and pro-value.'
Among small-cap sectors, Ford expects business services in particular to perform well this year. 'Everybody wants to improve their productivity and profitability so this sector is in great demand and small caps are very strong in this area,' he says.
However, Crichton and Siddles both warn of danger among stocks in the financial sector. Siddles says financial stocks have done well for the past two to three years on the back of falling interest rates but are now looking expensive.
Crichton argues rising consumer borrowing within the US could lead to problems among lenders. On a more positive note, Siddles believes the health sector, specifically biotech stocks, could see an improvement after two years of retrenchment.
Technology could also have a good run in the first half of the year, he says, but is best avoided over the long term as bubbles such as that seen in the sector in 1999/2000 generally take a decade to recover from.
Ford is negative on real estate due to the growing concerns over falling property prices and the fact they tend to be low-growth/high-yield investments.
Outperforming large caps.
Greater upside potential on recovery.
Third year of US presidency.
Moves to overweight equities and fixed income
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