Small-cap analysts at the Bank of America Merrill Lynch have a bias toward cyclical stocks in 2014.

Health care, technology and industrials are all rated overweight by BofAML heading into the new year. Health care and technology small caps in particular have an advantage because their valuations are considerably cheaper than industrials.

As we leave 2013, we are sticking with overweights to these groups, with both sectors attractive on a valuation basis, have very strong balance sheets and have been redeploying capital back to shareholders, the analysts said in a report. In addition, if M&A picks up next year, we think these two sectors will benefit.

But BofML reserved its favourite overweight for industrials, which it believes will especially benefit as economies around the world begin to register stronger economic growth.

The group does well when interest rates rise, will benefit from better economies outside of the U.S., and with the resurgence of manufacturing in the U.S., will also thrive, the analysts said.

But they add there are some downsides. As mentioned, valuations for industrial small-cap stocks are relatively high compared to the rest of the space, while many managers have overweight ratings on the group even though earnings revision trends have yet to show improvement.

The BofAML analysts also raise concerns about the health-care space, where they see a lot of lower-quality stocks.

Our biggest issue with health care is that it does make up a big portion of our low quality bucket and we think these stocks will lag behind in 2014, the analysts said.

As for the rest of the small-cap space, BofML rates energy, financial and material stocks as market weight, while they rate consumer stocks andutilitiesas underweight for next year.

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Health care, tech and industrial stocks favoured in 2014