Small Caps Lead the Way

Is the global recession behind us? There are as many answers as there are doubts. But, Canadian investors seem to be optimistic about economic recovery, and are displaying their optimism through investments that may be considered slightly risky in uncertain times.

Canadian investment dollars have been flowing into small cap companies. Small cap refers to stocks with lower market capitalization. Small cap companies, (the average capitalization being around C$370 million), took a severe beating in the recession. When the financial world did not come to an end, these stocks bounced back more than others, due to their severe drop.

Lower prices have certainly attracted investors to the small caps. However, true believers in global economic recovery have been willing to take on the larger risk of these stocks, believing that the risk will produce a handsome profit.

This is not to say that all small caps are attractive to investors. The wise investor still must pick carefully. Investment analysts state that small caps in energy, materials, and consumer discretionary sectors are proving to be the most attractive. In fact, energy and materials comprise roughly half the weighting of sectors in the BMO Small Cap Index. The index monitors and rates a portfolio of around 400 companies valued at nearly C$150 billion.

The future is still uncertain. However, investors seem to indicate that there is reason for hope. Several months ago, many economists and investors feared that global economic collapse was on the horizon. Based, though, on recent investment activity, many are beginning to see rays of sunshine on that same horizon.

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