Why I'm Bullish On Small Cap U.S. Stocks

By Henry Ma, Julex Capital Management

Major U.S.equity indexes improved in September after declines in August. The easing of military tensions with Syria and diminished fears of Fed "tapering" contributed to the positive outlook, though that was offset by ongoing fiscal negotiations in Washington.

Emerging market equities indexes performed well, reversing steady declines since February. Most international stock markets in developed economies and U.S. small cap also showed gains; U.S. fixed income markets ended with modest positive returns.

Our fundamental and technical factors continue to indicate a "risk on" opportunity for investors, Washington fiscal maneuvering notwithstanding.

"Risk On" Theme Continues

The economic and market variables favor risk-taking and stock markets around the world.

  • Leading economic indicator and other economic data continue to hold strength. U.S. ISM Manufacturing Index declined slightly to 56.2 in September. Globally, the Euro zone recession seems to be over and the Chinese economy is stabilizing. In Japan, the super-size monetary stimulus has contributed to an economic recovery.

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  • The S&P 500 Index maintained its strong upward trend, trading well above its 10-month moving average in September. The MSCI World Index also remains in a up trend.

  • Global central banks continue supporting the equity markets with ultra loose monetary policies. The Fed may taper its bond purchases later this year, but we expect the process will be orderly and slow given the high unemployment rate.

  • Market volatility has been on decline as investors feel more comfortable with risk-taking, and VIX ticked down a bit in September.

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I continue to favor mid and small cap U.S. equities and have started investing again in emerging market equities. In U.S. stocks, I have new positions in the financial and materials sectors and have shifted out of the large value style funds. In my opinion, the outlook for growth and small cap sectors is promising.

The emerging markets have shown new life that started slowly during August with resurgence from China and South Korea. That rebound has expanded to other emerging markets. I have taken new positions in seven emerging market countries/regions, especially in Asia.

For income-oriented investors, I think the timing is right for a well-diversified entry back into the income-generating area as interest rates are much higher than a year earlier. We are fully invested there with broad exposures to high dividend stocks, high yield bonds, energy MLPs, emerging market bonds, and bank loans.

The investments discussed are held in client accounts as of September 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance does not guarantee future results.
Henry Ma, Julex Capital Management

Henry Ma, Julex Capital Management

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