Ignis UK smaller companies fund manager David Clark believes small caps will outperform mid and large-cap stocks in the second half of this year as the broader market struggles with the fallout from the general election.
Clark says the market will react adversely to austerity measures brought in by a new Parliament, even though these may not take effect for months.
He says: “The stockmarket is a discounting mechanism and this will create a very tricky second half for the FTSE 100 specifically and the FTSE mid-250. Around that time, we will really see the small-cap index come into its own. I see it overtaking the FTSE All-share.”
Over three months to March 12, the FTSE small cap index returned 6.7 per cent against 8.2 per cent from the FTSE All-share, according to Morningstar.
Clark adopts a bottom-up strategy but is steering clear of consumer-oriented stocks and favours healthcare, mining and oil stocks. He says there will still be difficulties for some small caps but they will benefit from not having exposure to banks, which are struggling to increase top-line growth. Clark says: “The smaller the company, the nimbler they are and the faster the pace of earnings growth, generally speaking. You can pick out a million exceptions to that but we would not be invested in them.”
But Whitechurch Securities senior analyst Ben Seager-Scott is backing large caps to outperform amid an uncertain economic backdrop.
He says: “There is a case to be made for good stockpickers but we are keeping well away from small caps because if there is a market correction after the election, even the best small-cap fund manager is going to take a hit compared with large caps which have pricing power and can weather a downturn.”