Small-cap stocks started 2013 on a high note, but have since taken a hit.
They’ve trailed the large-cap index by approximately 3%, says Jennifer Law, vice president and portfolio manager of Canadian small cap at CIBC Asset Management. She’s the manager of the Renaissance Canadian Small-Cap Fund.
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This lackluster performance is largely due to weakening in the energy and materials sectors.
“We underperformed large-cap energy by a good 8%,” adds Law, so these two sectors have to improve before Canadian small caps can outperform.
“We [also] need to see some stabilization in gold [pricing],” she says. With increased confidence in global growth expectations, base metals will do well.
It would help if Canada had solutions for accessing oil like more pipelines. Investors would then be more confident in our energy space.
“Access is an issue, but I think a positive decision on Keystone XL could alleviate some pressure,” says Law.
Investors looking for good returns have to take long-term, contrarian views since there are still growth opportunities. They can “look at some of the valuations in energy,” she says, which are quite attractive.
In the near term, however, she warns your clients will be subject to a lot of headline risks and pricing will be volatile.
The news for small caps isn’t all negative either, with certain sectors performing better than large caps. This includes the industrial and financial divisions.
When Law invests, she focuses on growth at reasonable prices. “We’re not top-down people, we’re bottom-up,” she says. “[Right now], we’re not expecting massive GDP growth in developed countries. We mostly focus on what a company does on a micro level.”
In the short term, she suggests looking to the information technology sector, where core business is rising about 10% a year.