Alpine Capital: There’s a small cap caldera forming where cash-strapped ASX traders used to be. And it’s just a matter of time…

Alpine Capital says there’s a caldera forming where cash-strapped ASX traders seeking liquidity used to be.

The 2023 flight to safety has left many leading ASX micro-and-small caps names undervalued and primed to erupt.

Launched earlier this month and servicing emerging co’s and their investors is the new wealth management platform Alpine Capital.

Spun out of Wentworth Securities and RE Capital, Stockhead cornered a few of the executive team – a combo of big name blue chip standard advisors and brokers including Thomas Schoemaker (Head of Wealth Management), Phil Cawood (Head of Institutional Sales), Malcolm Nutt (Director), Charlie Reed and RE Capital founder James Emonson.

With the Israel/Hamas conflict in full spiral and with global markets looking visibly rattled, Stockhead asked the Alpine team for a rundown on where they see the trajectory for the local benchmark.

With the ASX now in deeply in the negative for 2023 and facing down a fresh surge in US bond yields, Alpine’s Charlie Reed and Phil Cawood say the small cap sell off over 2023 is creating a bit of a small cap caldera and it’ll be worth sticking around to see when it blows.

But before Phil picks 2x small caps Alpine is backing for the big one –  here’s their rather comprehensive in-situ take as the final quarter of another volatile year looms upon us.

Year-to-date ASX shorts

I find sometimes – perhaps more so during these exciting days of macro economic uncertainty – that everyone likes to get straight to which stocks everyone else is shorting.

Today, we can do that.

ALPINE CAPITAL: TOP 10 ASX SHORT POSITIONS

Via Alpine

But why is that so satisfying to look at? Are we all closet contrarians? And Pilbara Minerals?

The ASX short of the decade remains way out in front on its eternal highway to hell…

Via Shortman

ALPINE: THE SITUATION ROOM

September saw the S&P 500 finish down 4.9%, the NASDAQ decline 5.8% and Australia’s All Ordinaries Index finish 3.57% lower.

Oil prices are set to remain high for the rest of 2023 having increased 25% since June to $US91 a barrel.

Saudi Arabia and Russia pledged to cut oil production by 1.15 million barrels per day until the end of the year, adding to inflationary pressure as fuel prices continue to climb.

Recent conflict between Israeli and Hamas may lead to further supply-side constraints for oil in the event of the US enforcing sanctions against Hamas-ally Iran.

US equities

US thematics

Alpine’s Charles Reed, the former head of Corporate Finance at PAC Capital, says September’s flat Consumer Price Index (CPI) reading highlights the current challenges in the US economy.

“The US Federal Reserve is taking a cautious approach to monetary policy indicating rates are expected to remain higher for longer as stronger than expected economic growth and employment, coupled with rising oil prices puts pressure on achieving the 2.0% long run inflationary target in a timely manner.

“The increase in the US Federal Reserve Rate has contributed to the AUD coming under significant pressure in recent weeks reaching lows of US$0.618, as volatility surrounding Asia’s growth and the robust nature of the US economy continue to weigh heavily on the short-term performance.”

LET’S TALK ROCKS

The S&P/ ASX 100 Resources index and the ASX All Resource Index have led resource focused indices to date since the start of 2022 with gains of 8.5% and
4.7% respectively, outperforming the mid cap and small cap resources sector.

Take a look.

ALPINE CAPITAL: BIG vs LITTLE ROCKS

Via Alpine

Charles says this is in-line with the view that many investors continue to seek a safe harbour in larger capitalisation stocks with higher liquidity as uncertainty around the current interest rate and inflationary environment poses a risk to growth focused stocks.

“Such growth in the larger resources space has been helped by higher-than-expected commodity prices with a falling AUD, with producers such as the mining majors BHP (ASX:BHP) , Fortescue Metals Group (ASX:FMG) and Rio Tinto (ASX:RIO) seeing similar share price growth to the ASX All Resources index over the measured period.

“As with most established global markets ASX investors were buffeted by the headwinds of unanticipated rate rises through FY23.”

CASH RATE FORECASTS

Via Getty

According to Alpine Capital, the August 2023 reporting season (for June 2023 full financial year results) was the third worst this century, with ASX 200 companies reporting a 2.6% EPS downgrade for the 12 months to June, significantly below the median reporting month downgrade of 0.7%.

The RBA expects inflation to decline to 3.25% by the end of 2024 and subsequently dropping further to the 2.0%-3.0% target range in late 2025, although there remains uncertainty around this outlook. Economists believe inflation in Australia could persist for longer than anticipated due to large increases in wage levels despite weak productivity growth, global supply chain disruptions related to the Russia-Ukraine war and rising oil and electricity prices staying firm.

Charlie says local equity capital markets – like many others – have done their best to shift capital through a challenging 2023.

“Here we’ve seen its led to a sell-off of names in growth sectors including Technology, Health Care and Consumer Discretionary that had experienced strong performance in the preceding two years.

“Whilst FY23 results saw many companies outperform revenue estimates off the back of resilient nominal GDP growth and consumers with excess savings, profit margins were significantly impacted as a result of increased interest rates and higher wages.

“However, despite the sell-off of listed equities in select sectors there’s been support for larger, more liquid names with the ASX All-Ordinaries Index +8.7% for the 12 months to 30 September and the S&P 500 Index +4.8% respectively.

“Highlighting the juxtaposition between larger, liquid stocks and lower liquidity names the S&P/ASX Emerging Index underperformed the market falling 3.2% on a 12-month rolling basis,” Charles adds.

ALPINE CAPITAL: KEY ASX INDICES (12 MONTHS)

Via Alpine

Charlie explains the obvious underperformance across the local smaller cap companies appeared to impact stocks “irrespective of sector” with companies with a market capitalisation of $20.0m-<$100.0m down 16.7% for FY23 and companies with market capitalisation of <$20.0m shedding 37.5% during FY23.

“In short, the premature end to ‘easier money’ saw investors return to a defensive positioning away from the growth stocks that had outperformed the market through FY21 and FY22 and instead sought a safe harbour in larger cap companies (>$1.0Bn) which tend to offer higher levels of liquidity and the ability to exit underperforming positions if required.”

The not-so-liquid corners of  the ASX Tech, Health Care and Consumer Discretionary sectors were among the first sold and hardest hit as investors looked to reverse their risk-on positioning adopted through and inspired by the flood of cheap money circa COVID-19.

Alpine Capital believes this turnaround is beginning to offer cyclical and valuation advantages for the less-liquid and recently less-loved ASX Small Ords (XSO) and ASX Emerging Companies (XEC) names.

“With larger capitalisation stocks becoming crowded we expect investors to embrace smaller companies to achieve outperformance through FY24 once central banks indicate a less hawkish stance than currently foreshadowed.

“Should US Federal Reserve continue their hawkish stance on the Federal Funds Rate, remaining higher than the RBA’s cash rate will prompt foreign investors to flock to the US, potentially pushing the Australian dollar further down below the 50-day EMA of $0.6460 into the $0.6300 level or threat of breaking open the $0.6200 level over the long-term.”

ALPINE: ASX PERFORMANCE by SECTOR & MARKET CAP

Via Alpine Capital

By the numbers, the S&P/ASX 200 Utilities and IT indices have led ASX performance over the 12 months to date with gains of 32.0% and 28.1% respectively, followed by Consumer Discretionary up 14.8%.

Via Alpine

Alpine says that despite Australia showing promising early signs of a slowdown in inflation and economic activity, we’ve still got a tight labour market, rising wages, lower productivity and higher energy prices which to place cost pressure on Australia’s economy.

“So, Australia’s CPI coming back to the target 2.0%-3.0% range is likely to remain the focus of Australia’s central back for the balance of 2023 and into 2024.”

“As interest rates remain higher in the US the lower Aussie dollar and the higher USD should continue to drive competitive demand for Australia’s resource exports including coal and iron ore.”

Via Alpine Capital

Charlie says that in the face of higher interest rates, a lower AUD and weaker domestic spending, it’ll be more of exactly what happened last week – Consumer Discretionary, Technology and Health Care equities “are expected to remain challenged.”

“Roll-off of fixed mortgages will impact on consumer spending with an estimated 13% of variable rate mortgage holders now being unable to cover household expenses, up from just 3% in April 2022.”

ALPINE: THE MOVING RBA INFLATION TARGET

Via Alpine

Phil Cawood, Alpine Capital’s co-founder & head of institutional sales,  says almost two years into the global critical minerals arms race and it’s becoming clearer which local firms and sectors are best placed coming round the turn. Ever since the US President Joe Biden won support for his $560bn Inflation Reduction Act (IRA), select Australian companies have ‘hit the accelerator.’

“Biden’s IRA deal which Australian Prime Minister Anthony Albanese signed up to in May is very much a defence initiative within a cost-cutting/energy transition legislation.

“At the very centre of it all is Australia and Australian companies – there’s a footrace to secure and develop critical minerals as an increasingly urgent diversification of the new energies supply chain away from China.

Phil says the greater bulk of the globe’s separated rare earths (REEs) and almost three-quarters of Australia’s lithium sales end up inside China.

“Beijing dominates the manufacturing of solar cells, rechargeable batteries and also motors, and – with the kind of political tension and economic division we’re seeing right now – it’s mathematical that the US and it’s partners are looking for sustainable paths to unwind that level of concentration.

“So there are many rich opportunities within the local emerging market segment which we see as attractive.”

Amaero International (ASX:3DA)

Under the shifting geopolitical sands, 3DA just moved their flagship titanium, refractory, and specialty alloy-powder production ops, and applied research and development endeavours to the US.

“Since Hank Holland has taken the reins as executive chairman in August 2022, Hank and his team have done substantial work to position Amaero as a key beneficiary of US critical minerals on-shoring as Biden’s IRA plans come to fruition.

“Amaero is positioned to leverage the resurgence of the US manufacturing sector and proximity to a more robust regional ecosystem.”

3DA is strategically establishing a vital cog in the industrial capability that aligns with what are now ‘paramount initiatives’ in advanced key materials and manufacturing, ‘while bolstering supply chain resilience’ for critical minerals and aerospace and defence production.

Titanium Powder Market Growth
Global Demand – By End Use Segment, 2022-32

Via 3DA

Phil says the announcement marks a significant milestone and step-change for Amaero.

“Amaero is pretty ideally-positioned to become a primary supplier of titanium, refractory and specialty alloy powder – and, just one example – these materials are the building blocks of hypersonic weaponry.”

The company also boasts an entirely unique, next-generation atomiser, the first of its kind in the US (and the second globally), which produces ‘a world-leading yield of the highest-value powder spectrum.’

“The production of C-103 (Niobium) from the company’s new facility in Tennessee has it well placed to leverage on-shore US aerospace and defence demand in coming years,” he adds.

Amaero plans to dedicate the first atomiser’s production to C-103, with high-performance, heat-resistant properties critical to areopsace and defence applications.

Last week A3D told the ASX that within the refractory and specialty alloys market, Amaero distinguishes production by ensuring very high-temperature alloys, such as C-103, are produced without contamination.

“Resulting in the purest powder that can be produced today.”

Matsa Resources (ASX:MAT)

Phil says that in the current target rich environment the Alpine team has collection of preferred themes and sectors.

“But, at this stage the team continues to look at companies with a focus on the thematics which have proven experienced Australian early-stage investors want to back: leaning on the FX outlook, the geopolitical landscape and the risk appetite – we’re particularly encouraged by some of the ASX gold companies.

“Matsa Resources is one to look out for with 926K Oz at 2.5g/t and under exclusivity with AngloGold Ashanti.

Via Matsa Resources

Last month, Matsa Resources (ASX:MAT) secured further capital via an oversubscribed placement from major shareholders, including Deutsche Balaton and a number of new investors as the diversified digger fast tracks its lithium assets in Thailand and eyes the potential sale of its 936,000oz Lake Carey gold project to AngloGold.

Matsa is progressing its Thailand lithium ambitions, closing in on a maiden drilling program, says Phil.

Matsa Re-rating timeline

Via Matsa Resources

ALPINE HOPING FOR A WHITE XMAS

Charles says Alpine Capital‘s goal is to provide full service advisor, stockbroker and wealth management platforms for Aussie emerging companies and their investors.

“It’s an experienced and well regarded team with significant experience in capital markets, emerging equities, corporate advisory and wealth management, boasting Corporate Finance, Institutional Sales and Wealth Management divisions.”

Charlie says Alpine formed with clients seeking deals to launch before Christmas.

“In our experience completing a transaction is only the start of the client journey.

“Through the addition of Institutional Sales and Wealth Management to our service capability we will work with companies and investors on private and public market opportunities across technology, natural resources and general industrials. I am excited by the initial interest, including a range of transactions prior to Christmas.”

At Stockhead we tell it like it is. While Matsa Resources is a Stockhead advertiser, they did not sponsor this article.

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