Small caps and emerging markets tipped for outperformance in 2021

Dec 08, 2020
BNP Paribas discusses views for coming year in new report

The outlook for equities is bullish with small caps, European stocks and emerging markets all tipped to outperform, according to a new report from BNP Paribas. 

The bank says it is positioned for ‘risk-on’ across asset classes given the combination of effective Covid-19 vaccines, supportive central banks and expected fiscal stimulus.

Equity strategists have redrawn their expectations for next year following last month’s news of three successful vaccine trials. That began a rotation into sectors and regions that have lagged since the Covid-19 crisis hit stock markets in March. 

Smaller companies also came back into favor. During November, the Russell 2000 index of US small caps rose 17 percent compared with an 11 percent gain for the S&P 500. 

‘While technology stocks are still likely to be supported, we see the impact of a successful vaccine roll-out as decisive for the economy,’ notes the French investment bank’s Global Outlook 2021.

‘This will likely support ‘value’ stocks, especially small caps, which have been worst hit by the Covid-19 lockdowns. Moreover, we think European equities, which have lagged US equities significantly, will continue to bounce back as the impact of the vaccine is felt across Europe.’

Among the bullish factors for equities, according to BNP, is that investors are still sitting on plenty of dry powder.

‘We do think money has been put back to work, but we think that’s only part of the journey,’ said Greg Boutle, US head of equity and derivative strategy at BNP, on a webinar this week. ‘We think there is much more money on the sidelines.’

While BNP’s view on equities globally is positive, emerging markets are tipped to deliver the greatest outperformance, added Boutle. The backdrop of a weaker dollar, signs of a recovery in China and the incoming US administration ‘are all pretty bullish tailwinds for emerging markets,’ he said. 

Another key focus for 2021 will be the decisions taken at the UN Climate Change Conference (COP26) in November, notes BNP’s report. The bank identifies three key areas where progress may be made: standardized reporting methods, new goals on emissions and support for the carbon trading market. 

A supportive US administration makes co-ordinated global action more likely, adds the report. ‘If the US signs up to an ambitious target in Glasgow – just a year after officially withdrawing from the Paris agreement – we think that will add credibility to harmonizing reporting standards,’ write the authors.

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