Top broker reveals predictions for 2016

Credit: Mike Mozart

According to the Fairfax Press, global investment bank UBS has analysed market trends to conclude that small stocks significantly out performed blue chips in 2015. In its research note, UBS revealed the S&P/ASX Small Ordinaries Index (ASX: XSO) outpaced the S&P/ASX 100 Index (ASX: XTO) by 8.9%, most of which was driven by IPO activity.

Initial Public Offerings

Data from Dealogic shows that from 66 Australian IPOs in 2015, only three raised above $500 million, classifying most of them as small-cap stocks. Accordingly, the average return of 16.8% from all IPOs is weighted towards small-caps, leading to out performance of the index. This is something UBS touches on in its report and is a trend it believes will continue in 2016, with a strong stream of small-cap stocks already preparing for IPOs.

It’s not just IPOs

However, IPOs aren’t the only reason for out performance in small stocks. Companies like A2 Milk Company Ltd (ASX: A2M), Bellamy’s Australia Ltd (ASX: BAL) and Blackmores Limited (ASX: BKL) all posted triple-digit gains in 2015 (with Bellamy’s almost sitting on a 1,000% gain for the year to date), and punched well above their weight to notch a win for small-caps.

By contrast, market stalwarts BHP Billiton Limited (ASX: BHP and Woolworths Limited (ASX: WOW) all went backwards in 2015 due to tepid investor sentiment, dragging the S&P/ASX 100 Index down about 6%. UBS believes this under performance will continue, with fears of a prolonged commodity rout, anemic global growth and lingering concerns around capital requirements for banks holding blue chips back from a strong 2016.

The year ahead

So what does it all mean? UBS predicts small-cap stocks are the place to invest in 2016 for higher returns. Whilst it does not discount the ability of blue-chip shares to rekindle their glory days of past, UBS forecasts market trends will continue and lead to out performance in small-cap shares.

Despite this, I believe blue chips aren’t dead and have selected two stocks which investors should keep an eye out for in 2016.

1. Coca-Cola Amatil Ltd (ASX: CCL)

2015 has been a quiet year of consolidation for Coca-Cola Amatil, with the group investing $500 million in its Indonesian business to revive sales growth in South East Asia. The company undertook a strategic review and implemented several initiatives to reduce costs and boost earnings (with management declaring that earnings will not decline post-2014). Coca-Cola Amatil also sought to optimise product mix by experimenting with new products (such as Coke Life) and changing product mix in stores. Overall, these efforts appear to have re-based Coca-Cola Amatil leaving it positioned for a strong 2016.

2. QBE Insurance Group Ltd (ASX: QBE)

After years of continual disappointment, 2015 was QBE’s first ‘normal’ year where management did not announce a profit downgrade. In its year of transition, CEO John Neal cleared the decks by raising capital, divesting assets and cutting costs to see the business re-positioned for sustainable growth. With the U.S. officially lifting rates in December, QBE should stand to benefit as investment returns grow and confidence in the U.S. economy stabilises. This should see QBE outperform in 2016.

Foolish takeaway

Long-term investing is not about picking trends; it’s about buying quality companies at the right price. Although small-cap stocks may shine in 2016, a diversified portfolio should include all types of companies ranging from speculative to blue-chip. With that in mind, whilst I cannot promise that blue-chips will outperform in 2016, buying companies like Coca-Cola Amatil and QBE at current prices should provide a solid footing for successful, long-term investing.

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Motley Fool contributor Rachit Dudhwala owns shares of Coca-Cola Amatil Limited and QBE Insurance Group Ltd.. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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