Global small caps/healthcare set for post-COVID growth

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MEDIA RELEASE: Global small cap companies with accelerating and sustainable earnings growth could be poised for success as the COVID-19 pandemic enters a new phase of economic recovery, according to global asset manager American Century Investments.

American Century senior portfolio manager of Global Small Cap Equity portfolio, Trevor Gurwich, said small caps may continue to lead the market recovery, with government stimulus measures and investor optimism resulting in one of the strongest quarters in memory, despite heightened volatility. 

“Signs of improvement or stabilisation in multiple countries is further supported by substantial fiscal stimulus measures. As a result, select companies that may have suffered during the crisis are now likely beneficiaries as economies reopen.

“Stocks such as Basic-Fit, a low-cost European gym operator or Planet Fitness, a low cost U.S. gym operator which had revenue severely impacted in the short-term due to lockdown measures, have since recovered strongly, supported by their strong balance sheets, investments in technology and low membership cancellation rates. We also believe the companies have further scope to gain market share as smaller gym operators continue to struggle.

“Crocs, a casual footwear company, is another good example; the company spent years cleaning up its sales channels and excess costs in its business, however the pandemic led to massive supply disruptions and store closures and its share price declined by over 70 percent. But it has since seen a recovery in sales in China and Korea, in particular, and digital commerce channels have remained open. We believe the combination of store re-openings and a lower cost base will translate to sustainable and accelerating earnings growth,” he said.

Mr Gurwich said many de-ratings that occurred during the March sell-off are starting to re-rate, driven by improving fundamentals corroborated by improving mobility and transaction data, which have fuelled the strong performance in the global small cap space. For earnings growth, there is faster forecasted growth and faster acceleration of that growth in 2021 for small caps compared to large caps. 

According to Factset, while both small and large caps are expected post negative earnings per share (EPS) growth in 2020, global small caps are expected to rebound faster and to deliver 31 percent EPS growth compared to 27 per cent for large caps based on consensus expectations. 

“Small caps historically lead the market during recovery periods. If you look at small-cap behaviour over time, they typically sell off more heading into recessions because investors consider them risky at the time, but often lead the market during recovery periods, supported by faster earnings growth.

“Our focus remains on identifying companies we believe to have sustainable and accelerating earnings growth and we are finding opportunities in a broad array of sectors and geographies. We also are focused on companies with strong balance sheets, and consider factors such as credit quality, liquidity, access to financing, debt structure and an ability to survive revenue disruptions. It is the companies that have access to funding that will be able to survive the calamity of the CV-19 pandemic. They will be able to more rapidly adapt to the changing times and either invest in areas where the competition has weakened or acquire companies at more attractive prices.

“With the Global Small Cap Equity portfolio, information technology is a notable overweight, but we have reduced our weighting, in part, to help fund more compelling bottom-up opportunities in consumer discretionary stocks, many of which are likely beneficiaries of an economic recovery,” Mr Gurwich said.

Meanwhile, American Century’s senior portfolio manager of Health Care Impact, Dr Michael Li, said healthcare stocks produced strong gains in July, helping the S&P 500® Index end the month in positive territory year to date. 

“It’s a remarkable turnaround given the February and March bear market, with massive monetary stimulus from the U.S. Federal Reserve continuing to fund the rally. 

“Health stocks led the broader market before finishing just behind the S&P 500. In the Health Care sector, every industry segment produced strong gains except Biotechnology, which gave back recent gains in July,” he said.

Stocks within the sector historically outperform the market by almost 2 per cent on average, especially during periods when macro uncertainty is prevalent. When innovation delivers new products and services, it tends to outperform, and the current environment accommodating these developments.

“We believe companies that are truly transforming how healthcare is being delivered will ultimately deliver returns. And at a time when the world needs health innovation more than ever before, financial and social impact objectives can simultaneously be achieved.

“The healthcare sector is currently trading at a discount to both the broader market and its usual valuation and on that basis, the sector is quite attractive. In addition, investors are also starting to recognise the value of innovation and agility presented by many healthcare companies.

“Incorporating a mix of early-stage and more established health care stocks can help balance risk. Early-stage companies present a higher risk and return profile but that’s to be expected and investors should focus more on the long-term sustainable growth potential of a company,” Dr Li said.

The American Century Health Care Impact Equity– managed by Dr Li – seeks quality stocks by incorporating acceleration, relative strength, and valuation, and currently has $US1.66 billion as of 6/30/2020 in funds under management.