UK mid-cap stocks enjoyed a strong rally in 2012, outperforming large-cap peers in the FTSE 100, but OMAM's Richard Watts says 2013 could see similar returns.
UK mid-cap equities were among the stronger asset classes in 2012.
Why bull run still has legs
This was not obvious as the year began and it is curious to think back on how much has changed and how quickly. If the past year taught us anything, it was the need to manage for the unexpected.
If ever a period was ‘macro-driven’, the winter of 2011/2012 was it. Mario Draghi, who is probably the individual most responsible for dispelling euro-paranoia, was only confirmed in the role of president of the European Central Bank in June 2011 and only took office on 1 November. He rapidly transformed into ‘Super Mario’.
The first long-term refinancing operation was in place within six weeks and the second within a little over 12 weeks. Equally radical measures soon followed, summed up in the now-famous phrase, ‘whatever it takes’.
It is interesting to see how different types of assets responded. Equities were generally positive, with those perceived as higher risk outperforming, including UK small and mid caps and global emerging markets.
However, following a lull in April and May, UK small and mid caps were the favoured place to be. By the end of December (to the 26), the Numis Smaller Companies index (ex ITs) had returned 29.2% and the FTSE 250 (ex ITs) 28.9%. This was more than double the return for global equities or emerging markets, with the MSCI AC World index and the MSCI Emerging Market index returning 12.3% and 13.4% respectively.
So, why such superior performance from what – in recent years – has been something of a Cinderella asset class? And, more importantly for 2013, will it continue?
Before we look ahead, it would be useful to examine in a bit more detail the sources of performance in the mid-cap area in 2012. There are two things to notice.
One is that returns in 2012 were fairly well spread – in contrast to the binary markets we have got used to in recent years. Industrial metals and mining were the only sectors to be seriously negative, and they were affected by stock specifics.
As might be expected, the highly defensive sectors that did well in the hurly-burly of 2011 tended to underperform, notably utilities. But quite a bit in the sector-level returns took the market by surprise in 2012.
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