Westpac Banking Corp (WBK)

 

Big cap growth to drive bull market

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Have you gotten big yet? Do it now - big cap growth shares will lead the rest of this bull market. And there's plenty of bull market left.

Early stages of bull markets tend to be led by small value shares. When smaller shares lead, there is also higher "market breadth" - a larger percentage of shares outperform the broad market. But in later stages, large cap growth takes over as market breadth falls.

Why do small value shares lead early on? Small value companies tend to be cyclical - economically sensitive to the extreme. In the last part of bear markets, investors are intensely myopic and fearful. If all is as bad as folks fear, these firms could then go bankrupt - and soon. So, small value stocks get super-deeply depressed.

But later, there's a bounce-back effect. Things end up being bad, maybe terrible, but not utter doom and better than most feared. Sentiment melts slightly and the economically depressed stocks boom huge off the bottom - like after the March 2009 bottom - and almost all bear markets I can measure.

And those categories that did worst in the bear's end stages - the ones that scared investors most - fare best for a while. This "bounce-back" effect is why small cap value does best in a new bull's early stages.

Later, after the bull market's early phases, a new phase starts, where people are less myopic. They aren't quite so fearful and start thinking a bit longer term. Those small, economically sensitive cyclical firms don't have long-term growth prospects, no long-term vision. But big, growth-oriented firms do. Quality and growth. They have vision, deep product pipelines, quality management. That's what investors want then - so they move away from small value to the polar opposite - and large growth takes over leadership.

The rotation from small value to large growth doesn't happen overnight. But when it does, it lasts a long time. Large cap growth started beating small value fairly regularly early in 2012 - it's early still. What's more, as bull markets end, breadth typically falls to less than a third of the broad market (measured using the longer history of US stocks - but it's the same globally). We aren't even close yet - there's room for this bull to run.

And when large cap outperforms, the outperformance margin can be huge - don't miss out.

What should you buy? Lose small value - firms whose growth is closely linked to economic growth. Go bigger than the weighted market-cap average of global stocks, currently over £63 billion. There aren't many stocks there to pick from; but do it. The longer the bull market runs, the bigger you should go.

Focus on high-quality firms with deep product lines, good management, and good earnings histories. Think about firms folks will think smart to own as the bull market is ending - but they won't realise it. In other words, buy now what others will pay up to buy later.

Go big, but start with Australia's Westpac Banking (WBK). Down Under there is a banking quadropoly, and all four are very solid compared with European and US peers. When we finally get past this paranoid period this bank stock will rebound. Westpac now trades at 10 times trailing earnings and has a spectacular 8.5% dividend yield.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.