Buying small caps? Watch these 3 sectors

Small caps tend to outpace large caps over the long term.

And while small caps lagged large caps in 2014, that was an exception, says Jennifer Law, vice-president and portfolio manager at CIBC Asset Management.

Whether they regain their winning streak in 2015, she adds, will depend on consumer sentiment in three key sectors: energy, materials and financials.

“Small caps have more beta in energy holdings. So this sector will have to be fairly positive. Small caps also have more in materials — gold companies, base metals, lumber. That sector will have to be healthy as well,” Law says.

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She also points out that financials feature heavily in small caps, so “we need to see more confidence coming back to the market for small caps to do well.”

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Given the current unstable geopolitical backdrop and diminished investor confidence, small caps may not rebound in 2015. “We’re not sure we’ll see [an outperformance] in 2015, given where we are right now,” Law says.

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As for oil, which is a key performance driver for many small caps, “We’ve bottomed, but we don’t have a lot of visibility for the speed of recovery.” However, she says, sentiment could change quickly based on the outcome of the upcoming preliminary Iran negotiations in March, and the OPEC meeting in June.

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