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US Stocks - Small Cap

ETFS: IWM IJR VB - GLOBAL EQUITIES TEAM, OCTOBER 22, 2014


TRADE SUMMARY


- Stay long the US small cap market (ETFs: IWM, IJR, and VB).
- The BUY rating was assigned at 624.24 on 7/20/2010.
- The BUY rating has already helped investors receive potential returns of 77.32%.
- Our target return is 29.92%.
- While the initial target has already been reached, we maintain our BUY rating as we believe the small cap stock market will continue to perform well.

ANALYSIS


One of our main trading views in the US has been adding long positions in the small cap stock index.

Our positive expectation for growth in the US is based on the economic indicators remaining relatively strong. Our basic read on the macro picture is quite positive, so we are less concerned about some of the things (credit risks, re-accelerating inflation) that some investors have worried about. We expect the combination of better-than-consensus economic growth and ample liquidity to be positive for US cyclical assets, a view that runs through our market forecasts and many of our investment outlooks on the US. Therefore, our view on the small cap index is bullish, even in the longer term.

The stable macro data in the US has helped the markets to respond to the relaxation in risk and improved fundamental news. The purchasing manager numbers were notably strong again, in line with our robust growth forecasts. Corporate earnings growth also remained quite healthy. All else being equal, strong earnings growth could indicate that the risk of a double dip is now lower. On the other hand, the employment data in the US - while noisy - is still basically on an improving trend. In addition, with improving state of the financial sector and rising real incomes, we expect real GDP growth in the US to realize above consensus.


The combination of incrementally more growth acceleration, with still accommodative policies is a very friendly one for US cyclical assets. In addition, the real return on cash and short-dated credit instruments is now relatively low, especially in relation to other risk alternatives. Taken together, the factors discussed above suggest lower volatility and a better market condition. Therefore, this is the optimal point in the cycle to be taking a long position on the small cap stock market.

If you like our bullish view on the small cap market, please feel free to 
  
 our analysis.