Trump win prompts record week for small caps

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The presidential election has seen US small cap ETFs last week enjoyed their best on record for inflows, while November is set to be the best month for small cap stocks since 2008.

US small cap ETFs attracted $6.5bn last week with the bulk of that, $5.5bn, coming after the election of Donald Trump.

The smallest 10 per cent of stocks have returned 8.6 per cent more than their peers at the opposite end of the market capitalisation spectrum, Markit says.

The figures put November on track to deliver the widest gap between the two groups of shares since 2008.

The small-cap focussed Russell 2000 index has returned 7.2 per cent since Trump’s election, whereas the S&P 500 has delivered 1.6 per cent.

The rally is being attributed to Trump’s domestically-focussed rhetoric.

The smallest third of US stocks by market capitalisation have outperformed the market average return by more than 3 per cent in the three days following the election.

In contrast, the largest fifth of US stocks have trailed the wider stock universe by 4 per cent over the same period.

Heartwood Investment Management investment director Michael Stanes says investors should hope Trump will water down his “unpredictable, irascible, irresponsible and divisive” rhetoric, but says it cannot be discounted.

However, Stanes adds that Heartwood is “modestly adding to equity risk” in its portfolios through its US equity allocation.

“We expect an incoming Trump administration to prioritise the domestic agenda, and that should be supportive to US smaller companies and certain sectors, including industrials.

“Therefore, we are taking exposures to both of these areas through passive instruments. Key risks to our view include inflammatory rhetoric out of Trump and higher bond yields having the capacity to upset equity markets.

“Overall, though, we believe longer-term structural economic developments in the US are compelling for value and cyclical areas of the domestic equity market.”