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Top Thinkers in Business Publish “A Transforming World” – Shed Light on Opportunity in Small-Caps

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BofA Merrill Lynch Global Research, Merrill Lynch Wealth Management, and U.S. Trust earlier this week published a report and Webcast called “A Transforming World,” encapsulating the recognizable trend of U.S. investors shifting into equities (and their inherent risks) and away from bonds.

“What we’re seeing in the financial markets is a return to normal as investors shift from the defensive, post-traumatic stress environment that characterized the markets after the financial crisis,” Merrill Lynch Chief Investment Officer of Portfolio Strategy Mary Ann Bartels said in the report. “Today, investors increasingly are seeking growth, and that’s reflected in the flows back into the equity markets. In a sense, the ‘new normal’ is really the ‘old normal.'”

While the report doesn’t acknowledge the potential this trend offers small-cap stocks, it’s a viable thought that small businesses looking to attract shareholders and raise capital stand to benefit from the shift.

The report notes a “resurgence of American innovation” as the U.S. economy begins to realize the bounty of years of development in technology and medical advances finally coming to fruition. In addition, innovative oil and gas extractive technologies are propelling the nation toward energy independence, which could lower consumption costs and encourages competition in the U.S. marketplace. All this creates a bull market that top thinkers at BofA say could last a decade or more.

That means more shareholders are sharking the waters in search of stocks with proven performance, but also with renewed enthusiasm and confidence in those emerging technologies and markets – in the small-cap world, where the field is full of promising clinical and development-stage businesses, the fruit is abundant.

Innovation in business, technology, energy and medicine, as well as labor market shifts, is inflating optimism of the United States’ ability to thrive and continue innovation, says the report.

The recession triggered cuts in labor costs, which allowed companies breathing room to increase profitability. As a result, American manufacturers have established themselves as competitive global players – as the report notes, U.S. citizens and corporations still receive more patents than those of any other country in the world.

And because stocks are rising along with earnings expectations, the equities are still valued at a discount, says the report, which in turn has resulted in the price/earnings ratio at 14.5 times projected 2013 earnings, below the 15.5-16 times earnings deemed fair value.

The Russell 2000 Index, which measures the performance of small-cap stocks, earlier this month spiked to a record high of more than 1,008 points. Small-caps have outperformed large-caps by roughly 40 percent in seven of the past 10 years, though the small-cap segment is generally overlooked by many investors. Small-caps are a field of harvest for investors looking to diversify their portfolio and offer tremendous opportunity for those who can spot emerging growth patterns.

“The themes of a revival of U.S. innovation, shifts in the financial markets and global realignment all have different implications, so no single investing strategy can enable investors to maximize opportunities,” U.S. Trust Chief Investment Officer Chris Hyzy says in the report. “However, investors have a greater range of choices than ever before for addressing investment themes and ideas. They need to consider a wide range of asset classes, develop a global perspective and rebalance more frequently to stay ahead of the curve.”

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