ABN Amro Private Banking is betting that smaller companies will benefit the most as corporations boost spending in 2014 amid the fastest global economic growth in four years.
Smaller firms will rally the most among equities worldwide as they provide the tools and goods needed for larger companies to grow, according to ABN Amro’s wealth-management unit. Improving economic indicators mean the biggest companies will be more willing to increase expenditure and may look to acquire smaller competitors to support expansion, said Didier Duret, chief investment officer for the private bank.
“These companies are at the crossroads of innovation and new demand, and tend to benefit in the middle of an economic recovery,” Amsterdam-based Duret, who helps oversee 164.5 billion euros ($220 billion), said in a phone interview yesterday. “Increased confidence and domestic drivers are why we’ve selected small- and medium-cap stocks in what is now a more mature market. The last time we did that was in 2005.”
Earnings at companies in the MSCI World Mid-Cap Index will surge 93 percent in the three years through 2015, while profit for the benchmark MSCI World Index will advance 47 percent, according to analysts’ estimates compiled by Bloomberg. The measure of mid-size stocks has rallied 19 percent this year through yesterday, while the gauge of the largest developed-market shares rose 16 percent.
In the U.S., the Standard & Poor’s Mid-Cap 400 Index has climbed 21 percent in 2013, while the S&P 500 gauge of the largest companies has gained 19 percent.
Companies like Expedia Inc. (EXPE), which provides online travel booking services, and Arcadis NV (ARCAD), a Dutch designer of bridges and dikes, are likely to increase profit at a faster pace than larger firms during an improving economy, Duret said. Smaller companies are also less leveraged, with U.S. mid-caps holding 46 percent less debt per share than firms listed on the S&P 500, data compiled by Bloomberg show.
Duret increased his equity allocation to 44 percent of assets in September from 40 percent in June. ABN Amro predicts the global economy will expand 3.8 percent in 2014. That would be the fastest pace since 2010 and more than the 2.9 percent growth projected by economists in a Bloomberg survey. The bank cut its cash holdings to 9 percent from 13 percent, according to a report published today.
ABN Amro’s wealth-management unit maintained its overweight position in stocks for a fifth consecutive quarter, meaning it holds more of the assets than represented in benchmark portfolios.
“It looks like we are getting out of the woods, and it’s widely spread and evenly distributed across the developed regions,” said Duret. “There’s a constructive scenario ahead of us where many forecasters may be surprised by the cumulative effect within the economy. It has been the longest recession I’ve seen in my career, and it’s due time we got out it.”
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