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Big Trump promises help US small-caps shine

Wall Street is betting big on small.

US president-elect Donald Trump’s pledge to ignite faster economic growth has put the shares of smaller US companies on track to outshine big multinationals this year for the first time since 2013.

The Russell 2000, an index of shares with a median market value of less than $1bn, has surged 10 per cent to a record since the US election. That comfortably eclipses the 2 per cent advance since polling day in the S&P 500, a measure of large-cap stocks, that has yet to surpass its August peak.

A resurgence in the dollar is driving the outperformance of small-cap stocks, investors say, as larger US companies with overseas operations are more vulnerable to the drag a stronger currency will exert on their competitiveness.

“Small-caps in the US tend to be more domestically focused,” said Jon Adams, senior investment strategist at BMO Global Asset Management. “Dollar strength is likely to be a headwind for the large multinationals represented in the S&P 500.”

In another sign of the way in which Mr Trump’s victory has reshaped trends in both stock as well as bond markets, an exchange traded fund tracking the Russell 2000 took in $3.5bn last week, the largest inflow of any product, according to ETF.com.

The Russell 2000 is up almost 16 per cent for the year compared with a 6.8 per cent gain for the S&P 500.

Among small-cap stocks, the gains also reflect those sectors investors believe will be winners under the new administration.

Biotech and banking have emerged as likely beneficiaries as Mr Trump, alongside a still Republican Congress, is expected to ease regulatory burdens. Banks are also enjoying expectations of an increase in interest rates should economic growth accelerate.

The likes of drugmaker Corcept Therapeutics, up 16 per cent, and Connecticut-based United Financial Bancorp, up 11 per cent, are among smaller companies that have rallied strongly over the past two weeks.

“Investors are rushing to get in front of where they think the money will flow in a Trump administration and I think they believe this is small-caps,” said Alan Gayle, director of asset allocation at RidgeWorth Investments.

A similar pattern has unfolded within the technology-heavy Nasdaq Composite where the largest companies have also lagged behind. The broader index is up 2.5 per cent since the election, while the Nasdaq 100 index of the largest and most active non-financial companies listed on the exchange is flat.

It includes Alphabet, Amazon and Apple, which have also been under pressure since given their dependence on global supply chains that Mr Trump’s protectionist promises could potentially disrupt.

“If there is any change in trade or immigration policy, that could affect those larger tech [companies],” said Mr Adams.

Post-election gains in the Dow Jones Industrial Average have propelled the index to further highs, but that is seen largely as the result of stocks with high prices, such as Goldman Sachs, exerting greater influence over the benchmark. The Dow is calculated on the basis of each member’s share price versus the S&P 500, which reflects the market cap of its members.

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