Vaughan Nelson Investment Management chief executive Chris Wallis says the next commodities super cycle is just starting, and he expects small stocks to outperform large ones in the next few years.
Wallis is bullish on commodities. In baseball terms, he says this commodity cycle is only “deep in the first innings “. He favours the energy sector.“What we see now is typical of the transition to a new commodity super cycle,” says Wallis. “Normally, we’d be in the third innings of this cycle by now, but COVID-19 and global politics around energy security have interrupted and delayed things.”
“In 2000, US small-cap stocks rose 30 per cent even though US large-cap stocks moved into a secular bear market for two years. As money rotated out of large-cap growth stocks, small-cap value stocks benefitted. We see the same trend happening again.”If Wallis is right, investors should consider adding small-cap exposure to their portfolio – a part of the market smashed this year when sharemarkets fell.
Wallis believes a rotation from large-cap to small-cap stocks will quicken in the next few years. “Global small- and mid-cap stocks have more attractive valuations and better organic growth than many of their large-cap peers.”asset managers in Australia saySmall industrial stocks in Australia last month traded at a 26 per cent discount to large industrials, Goldman Sachs research shows.
“By mid next year, we’ll be talking about the shape of the recovery and negotiating letters again like we did after the global financial crisis. That is, whether we are going to have a ‘V’, ‘U’, ‘L’ or ‘W’ shaped recovery. You have to position for that now.”Wallis says energy is the only sector that is “broadly attractive”, although stock-specific opportunities exist across sectors. Vaughan Nelson reduced its energy holdings this year after soaring returns from global energy stocks.
“It’s been a very challenging market for small-cap managers,” says Shamir Popat, Morningstar’s senior research manager. “When investors look to liquidate part of their portfolio during market volatility, small caps are often the first thing sold.”