Large cap stocks set to outperform smaller company stocks in 2011 and gold remain as a safe haven, it is predicted

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Written by Ray Clancy

Monday, 06 December 2010 11:03

Large cap stocks should outperform small company stocks in 2011 as is the norm historically when an economy is accelerating out of a recession, it is claimed.

Large cap indices have underperformed in 2010 largely due to the problems experienced at BP and the drab performance of GlaxoSmithKline and HSBC. In contrast small and mid cap shares have fared better, according to Ted Scott, director of UK Strategy at F&C.

However, Scott anticipates a shift back into large companies next year. ‘The UK is now well into the recovery phase of the economic cycle. Earnings growth forecasts and upgrades are slowing down and concerns persist over the stability of the UK, and global, economic recovery thus far,’ he said.

‘Many of the largest companies FTSE 100 Index are more defensive in nature and currently have modest ratings and higher yields. Against this backdrop, I anticipate that larger companies will outperform, particularly those at the top end of the FTSE 100 along with resources stocks and those with emerging markets exposure,’ he explained at a briefing in London.

Scott believes a key theme for 2011 will be de-equitisation, which will see more M&A and share buy back activity from companies. This should be positive for equities, as companies invest in their own or other businesses rather than raise money via the corporate bond market.

‘Unlike the personal and public sectors, both of which were heavily geared at the time of the recession, corporate balance sheets are relatively strong at the moment. Many companies have conserved cash and this offers more scope to buy back shares, or shares in other companies, which should help markets in 2011,’ Scott said.

In addition, following some big dividend cuts at the height of the financial crisis, Scott anticipates that some companies now have the capacity to pay higher dividends and are already beginning to do so. As a result, Scott feels that there will be a scramble for yield as investors, frustrated by the low returns in banks and also increasingly bonds, look to the equity market for higher and crucially, growing returns.

Scott’s previous prediction that gold would become an increasingly attractive asset in 2010 has proved sound. The metal has had a wonderful run in the second half on 2010, partly in response to the weakness of the dollar and Quantitative Easing, and is due for a period of consolidation like it had in the first half of the this year following a similar surge late last year.

Scott remains positive on gold for 2011 as an excellent ‘each way bet’ when yields on low risk assets are generally offering investors very little. Meanwhile, the potential risks that persist in the financial world add to its lustre. Until the global economy is on an even keel, Scott believes gold will continue to be a safe haven.

Scott also believes the trade and currency wars, which have worsened recently following the advent of QE2, will likely intensify during 2011 as China and the US remain intransigent in their policies.

‘This, together with the eurozone crisis, is one of the biggest risks for the markets next year. I think tensions will become escalated between the varying parties and there is a threat that protectionism will take hold unless some sort of consensus is reached. Should a tariff war ensue, this would be very bad news not only for world trade but also sentiment generally across worldwide markets, leading to a significant correction in the equity market,’ he concluded.