Welcome to phase two of the “Great Rotation”

With GFC fears fading, Aussie retail investors have returned to equities in a move that’s been labeled the “Great Rotation” by The Australian FInancial Review, among others.

But investors haven’t returned to all equities. Rather, they’ve returned to just kind. Namely, the ASX’s largest and best known companies.

Phase one of the “Great Rotation”

WOW, WES, CBA vs XJO last 12 months

This in part explain the incredible run up in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), up about 16% in the last twelve months. Over the same period, Woolworths (ASX: WOW) shares rose around35%, Wesfarmers (ASX: WES) rose around 39%, and Commonwealth Bank (ASX: CBA), rose around 36%.

At the same time, this incredible bull market has left one sector behind, and now this asset class looks to be poised for growth.

Phase two of the “Great Rotation”

NovaPort Capital, a small fund manager, has released a report this morning arguing that small cap stocks are likely to deliver some of the overall market’s best returns in the next three years.

“You tend to find that investors need to overcome the initial decision of whether or not they want to be in other more conservative asset classes or equities first, and then after they’ve made that decision typically they start to think about whether they want some small caps as well,” said NovaPort Capital profile manager Sinclair Curry, in conversation with InvestorDaily.

XJO vs Small Ords last 12 months

The simple chart at left illustrates the situation. In the last twelve months, as the ASX 200 Index rose about 16%, the Small Ordinaries Index actually fell about 8%. Meaning that this entire asset class was left behind by the bull market, and should be ripe for growth in the years to come. This is not technical analysis but a matter of common sense and direct observation. From such lows, small caps are likely to recover, and from such highs, large caps may stall out.

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