Why smaller ASX shares could outperform this year

While it’s important to invest in a diverse mix of ASX shares, both larger and smaller, small-caps could outperform in 2021.

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Investors may wish to review their exposure to small and mid-cap ASX shares.

It’s important to ensure a well-diversified portfolio. I’m sure you know the old ‘don’t put all your eggs in 1 basket’ cliché. In line with that investors would be wise not to invest solely in the smaller end of the share market.

But, as Bell Asset Management points out, small and mid-cap shares across the world significantly beat their larger peers during the recovery from the COVID driven selloff last year.

Small and mid-cap shares outperform

Small and mid-cap stocks, as measured by the MSCI World SMID Cap Index, have gained 111% since the market lows in March 2020. That handily beats the performance of the all-cap MSCI World Index, which is up 88% in that same time.

According to Bell Asset Management, “This outperformance was also apparent after prior sharp market drawdowns such as the GFC in 2009 and the dot-com bust of 2000 and persisted over a number of years.”

No one can say with any certainty that this same outperformance will be mirrored among ASX shares during the current market recovery. But it’s worth noting and taking some time to review your own allocation to the somewhat smaller end of the ASX.

Not that the blue chips haven’t largely been charging ahead as well.

Earnings smash expectations

As Bell Asset Management noted, more than 66% of the companies contained in the MSCI World Index beat earnings expectations. It said sales came in 3% higher than expectations and earnings were more than 20% above expectations.

The report pointed to the strength of the ongoing global economic recovery along with “tangible results of ongoing stimulus packages and rising consumer spending” as helping drive the exceptional earnings growth.

Looking ahead for ASX shares

With a look to the future, Bell Asset Management’s outlook for equities:

[R]emains favourable given rapidly recovering global economic growth and corporate earnings. With many countries still in the early days of re-opening, we see the potential for continued growth and further earnings upgrades. Inflation concerns have abated somewhat, but we are wary that it remains a potential headwind to profitability.

Happy investing! 

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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