Bottom Line: Year of the minnow

Click to follow
The Independent Online
IS THE bottom end of the stock market developing a dangerous head of steam? Silly tips are beginning to appear - a recent Specialeyes recommendation prompted a soaring price, a profits warning and price collapse all in one day.

Yesterday Hoare Govett confirmed that smaller company shares had soared 44 per cent last year, outstripping their larger brethren by a large margin.

Small companies are back in fashion with all the quick bucks and burnt fingers that implies.

The most interesting finding in Hoare Govett's research is that the obvious reasons for smaller company outperformance are only part of the story.

Small companies did well last year because they are more geared to national recovery, they have a heavier weighting in the best performing sectors and they are bigger beneficiaries from a low cost of borrowing.

But just as important is a shift in the market's willingness to accept the facts and act on the evidence. There is delay in the movement from blue chips to tiddlers, but when it comes it tends to overshoot in the excitement.

The market is driven by sentiment and fashion as much as economic reality, and it is still willing small shares higher.

Bulls of small companies this year also point to the relative performance of small and big companies in the US in 1992, when the American economy was at a similar stage in its recovery.

If we follow that model in the UK, Footsie won't look much different in a year's time while Hoare Govett will be popping the champagne corks.

Fishing for minnows should be profitable again this year if you can see them through the froth.

Comments