When do small caps outperform?

When equities are in favour, answers Jennifer Law of CIBC Asset Management.

And because risk appetite is coming back, equities, particularly small caps, are performing well.

“Small caps underperformed large caps up until a couple months ago,” says Law. “All signs are pointing to a rebound.”

Read: How to ride the small cap roller coaster

Small caps also do well when commodity prices, including gold, base metals and natural gas are high, she adds, because they tend to be concentrated in such industries.

Meanwhile, large caps are more focused on energy services, for instance, and provide different exposure.

The facts that natural gas prices have bounced back, and gold is coming out of a year-long slump are further indicators that small caps may outperform.

Read: Small caps get big returns

“For the first time in a long time we’re seeing gold equities outperforming gold as a commodity,” she says. “That’s a sign that people are bullish about this space and willing to add it to their risk appetite, but only [through] equities.”

At the same time, physical demand of gold is going up.

Read: Buy gold on the dips: Embry

“Central banks [are] buying more gold,” says Law. “Anytime any government prints money, you reinforce gold’s role in terms of storage value and an alternative currency.”

She suggests using small caps to diversify large cap exposures.