Favour as investors

The remarkable outperformance of small caps seems to have run out of puff, with investors finally turning their attention back to the growth potential of blue chips.

Since the beginning of October, there has been a clear divergence between the top 20 ASX companies and the small cap index. While the former have risen about 3 per cent, small caps are now off 1 per cent – and the difference is even more pronounced since the US election.

That’s in sharp contrast to the previous 18 months during which small caps rallied about 13 per cent, while the top 20 stocks collectively fell 15 per cent, weighing on the benchmark S&P/ASX 200 Index.

“We’ve had a reversal of the lower-for-longer, pay-up for certainty, safety yield thematics,” said Matt Sherwood, head of investment strategy at Perpetual Investments. “Investors have decided that trade is over and are buying up quality.”

Investors sold off bonds after Donald Trump’s surprise election victory, which saw the yield on Australian government bonds spike. This bodes well for Australian banks – that like to borrow at the short end and lend at the long end – meaning a steeper yield curve is good for the earnings. It also hasn’t hurt the local banks that President-elect Trump has vowed to slice regulation in the sector.

Big four lead way

As such, investors have poured money into bank stocks also as fears of further bank capital raising have eased both abroad and locally. The big four banks have led the local rally since the Trump election, each rising about 10 per cent as investors take advantage of the rotation out of yield plays.