In recent months I’ve suggested that a product called EX20, which invests in the stocks numbered 21 to 200 in the S&P/ASX 200 Index, looks like a god, diversified play for when interest rates start to fall. I have referred to it as being a rotation play into the stocks that haven’t fared well out of the raising of interest rates since 2022, but they’re largely good companies.

Over the last year or so, the top 20 stocks minus the miners, who’ve been waiting for a decent Chinese economic recovery, have risen to what many stocks experts think are illogical and irrational levels.

By the way, most of the number 21 to 200 stocks would be tagged as mid-caps and Jonathon Levin writing in The Washington Post has shown us how smart it is to be long mid-caps.

This is what he revealed: “Mid-cap stocks have delivered meaningfully better cumulative returns than the S&P 500 and small-cap stocks over the past three decades. For the mid-caps, that works out to a compound annual growth rate of more than 12 per cent, compared with roughly 11 per cent for the large-caps.”

And to make it more personal to your hip pocket, he showed that the difference adds up over time.

“If you invested $100,000 in mid-caps at the end of 1994, for instance, you’d have about $3 million today – about $700,000 more than you’d have by just investing in the S&P 500.”

I haven’t found any local research that says our mid-caps are long-term better performers, but I do think there’s plenty of reasons to believe that when rates fall, many of our ‘star’ big caps will be victims of profit-takers. Then mid- and small caps will have their days in the sun.

Vindicating my position are the views of analysts who assess our top 200 stocks, so let’s check out what they think might happen to the top 20 share prices over the year ahead, minus the underperforming miners.

This table shows that not all top 20 stocks look set for a sell-off, but the likes of Telstra (up 2.04%) and Transurban (down 7.49%) haven’t had a year like CBA, which is up 43.74% over the same time. Joining our biggest bank, JB Hi-Fi gained 86.64%, NAB 24.49%, Wesfarmers 33.69% and Macquarie put on 26.10%.

Meanwhile, Goodman Group has become a new age ASX star, adding 52.49% to its share price over the past 12 months and was just nudged by Xero up 52.96% over the same time.

For the record, ANZ rose 14.6% and explains why the expected sell-off is a small negative, while Westpac outshone its rival rising 43.04% over the year.

What’s interesting is that not all top 20 stocks are the same but here are the sensible conclusions after looking at what the analysts think they see in their market crystal balls:

1. The big four banks have largely outperformed and a sell-off is likely when interest rates are on the slide.
2. Wesfarmers and JB Hi-Fi are also outlier over-achievers and could easily cop a sell-off as the banks become victims of profit-takers.
3. The likes of Macquarie, Goodman, Telstra and Transurban are not likely to surge but they are unlikely to cop a big sell-off.
4. CSL, Xero and Woodside look worthy of gambling on but the October 2024 outlook for oil from J.P. Morgan isn’t looking great. This is what the expert oil watcher came up with: “Overall, J.P. Morgan Commodities Research forecasts Brent could average $US80 a barrel in the fourth quarter of 2024 and US$75 in 2025, declining to the low $60s by end-2025. Against a backdrop of rising geopolitical tensions and heightened market volatility, crude oil prices have soared in recent weeks.” (Oil prices forecasts are guesses and so Woodside could do anything!)
5. The outlook for BHP is up 10.6%, Rio 6.7% and for Pilbara Minerals the call is up 28.3%, but Morgans is tipping a 43.81% rise.

In conclusion, my call to reduce my holdings of the big four banks, Wesfarmers and JB Hi-Fi all look sound ideas. Going long mid-caps via EX20, as well as BHP, Rio and Pilbara Minerasls, all look OK plays, though the latter might need another year before it becomes a stellar performer.

The rotation out of big tech into small caps is happening in the US, with the Nasdaq up 11.56% while the small-cap Russell 2000 has spiked 16.07%.

Our rotation is likely out of our big cap/huge growers into the stocks that will love rate cuts. All we need is the start of the rate cut cycle.