Year-To-Date Equity Leaders: Asia Ex-Japan, Small Caps And Energy

The year is still young, but not too young to see trends that could define 2021 for leaders and laggards in US and world equity markets. Reviewing a set of exchange-traded funds as proxies highlights three key trends that deserve monitoring: leadership in energy shares, small-cap stocks, and markets in Asia ex-Japan.

Let’s start with US small caps. Year to date, various flavors of the small-cap factor are leading the field in the equity-risk-factor space. Posting roughly 8%-to-9% gains so far in 2021, small-cap growth (IJT), core (IJR), and value (IJS) are enjoying sizable premiums over their factor counterparts, based on data through Feb. 3.

Raymond James strategist Tavis McCourt sees a rotation unfolding that favors small caps and cyclicals, fueled by several sources, including a “wall of cash” via consumer savings. This rotation is still in its early stages, he predicts via Barron’s. Adding to the allure: relatively low or at least reasonably priced valuations. “This spread between P/Es based on market cap is about as extreme as 2001 and continues to argue for far better risk/reward in smaller caps if earnings estimates prove accurate,” he explains in a research note.

Carving up the US equity market by way of sectors points to strong leadership in energy stocks. Energy Select Sector SPDR (XLE) is the upside outlier in 2021. Through Wednesday’s close, XLE is higher by 10.1% — double the gain for its nearest competitor, Consumer Discretionary SPDR (XLY).

Energy’s rally is impressive, but keep in mind that XLE is driven by big oil shares such as Exxon Mobil and Chevron. The outlook for these companies is sketchy, analysts advise. “The uncertainties associated with the pandemic are going to continue largely unabated at least through the first half of this year as vaccinations continue to roll-out, but the uncertainties that are arriving from the long-term disconnect between [big oil’s] business model and climate realities, those are only growing — and they are not going to abate,” says Carroll Muffett at the non-profit Center for International Environmental Law.

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