UBS maintains a list of the top 20 small and mid cap stocks to invest in. In a new research note released on December 17, the firm updated the list to help investors navigate investing in small and mid cap stocks into 2021.
The small-cap index, the STOXX 200, has almost broken even this year. It is down 1% year-to-date, while the large-cap STOXX 600 and STOXX 50 are both down around 7%. However, if the list's outperformance over the years isn't enough to convince investors to invest in small caps. UBS equity analysts break down the reasons why investors should be considering small caps for in 2021:"Initially, paying a premium for large caps in a crisis is sensible, as large stocks tend to be more resilient to economic shocks," Ojeda said. "However, looking into next year, we think the environment is likely to favor small and mid.
"The announced fiscal stimulus is a key tailwind for small caps going forward. If we look at government fixed capital formation, we can see how periods of increasing government investment tend to support the outperformance of small caps," Ojeda said. "Going into next year, we have the largest fiscal stimulus program in history in the pipeline."3. Less research coverage
The return on equity valuations have been higher for large caps compared to small and mid caps, predominantly due to the fall in earnings per share, Ojeda said. Ojeda said that, for him and his colleagues, this means small caps are in a stronger position, given their gearing towards "real economy" sectors such as industrials and construction, which are the ones best placed to recover strongly next year. Large caps, meanwhile, are unlikely to see such a strong bounce-back, he added.
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