Markets

Stock market year 2021: investing in small caps

S.According to market analysts, mall cap companies are likely to be among the winners in the 2021 stock market year and will benefit if the crisis situation eases. Small caps are used to describe companies on the financial market that are not among the large and preferred companies because of their trading volume or market capitalization.

They often only have a low market capitalization of less than two billion euros. The Scottish asset manager Aberdeen Standard Investments is one of the most positive investment companies when it comes to small caps.

“Small caps are usually the first to be hit by a downturn,” says Aberdeen market expert Andrew Paisley, but companies are also the first to recover when the markets turn up and investors become riskier again. The statements made by the investment house certainly carry weight in the market, as the independent Scope rating agency recently awarded it another “best small-cap asset manager” award.

According to the asset manager, the prospects for smaller companies in the next year are good, mainly because of the potential corona vaccines. In addition, as a result of the recent poor price development (compared to the overall market), small caps are trading at a higher discount than ever before compared to the known standard values, according to Paisley’s explanation.

The so-called outperformance of small caps compared to their large competitors over a long investment horizon underpins this assessment, as a recent study by Lupus Alpha did pointed out.

EU Green Deal brings liquidity

According to Paisley, not all small caps suffered from the pandemic in the Corona year 2020. Due to their smaller size, they are more flexible than blue chips and can adapt more quickly to new market conditions. “At the height of the pandemic, we observed that smaller companies in the fields of technology, media, health, food delivery services or e-commerce also flourished during the lockdown,” added the investment expert.

Another aspect could help smaller companies to make it big in 2021: The European Union’s Green Deal, which will provide one trillion euros in liquidity. “This deal can only be won with the help of significant cross-industry innovations, from renewable energies and carbon capture to sustainable buildings and electric vehicles,” says Paisly, assigning smaller companies a pioneering role.

Dividend expert and investor Christian W. Röhl has similar views. “With the approval of the first vaccines, the end of the pandemic is now visible – even if there will be a lot of time until then, but the stock exchange is well known to be looking ahead. In addition, there will be further stimulus packages in both Europe and America. “

After consumption was the first to be absorbed, the second stage will be more about stimulating the economy, Röhl continued. “The focus of government measures will therefore be more on investment – and small and medium-sized companies should benefit more from this than multinational technology and pharmaceutical companies.”

As examples of profitable small caps, Paisley mentions the American generator manufacturer Generac and the Taiwanese battery manufacturer Voltronic. Another interesting small cap comes from France with Teleperformance, the market leader in the provision of call centers: “In 16 consecutive years Teleperformance has grown by at least 5 percent compared to the previous year,” says Paisley. “We therefore trust it that it will continue to exceed expectations in the future.”

Promising shares from Germany

The specialist for small caps meanwhile also relies on a German company: Nemetschek. With its software solutions, the company covers the complete management of construction and infrastructure projects and cost overruns are reduced.


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To the detailed view

The fact that Paisley relies on Nemetschek shows how the Scots choose stocks. They favor companies with strong balance sheets, robust ESG characteristics, and solid competitive advantages. With the Nemetschek share you have definitely shown a good hand.

After the Nemetschek share hit a 14-month low at around 32 euros in March, a steep recovery began, after which the price reached a record high of 74 euros in June. Investors who have been with Nemetschek for a long time also have nothing to complain about: over the past ten years, prices have risen by an average of 37 percent per year.

Favorable valuation is not everything

Investor Röhl is optimistic about the year 2021: “If a return to the sales and earnings levels of 2019 is achieved, many small caps are comparatively inexpensive and offer attractive dividend yields.”

According to the Berliner, however, investors should check very carefully to what extent the business models are resilient, i.e. resilient. The coronavirus has led to a change in consumer habits and investment preferences. Therefore, the investor’s view of the company’s debt is also important: “Because in small and medium-sized companies, it is particularly dangerous when the operating cash flows only just cover the interest burden.”

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