Maple-Brown Abbott reckons 2024 could be the best year for small caps since the GFC
\nOphir Asset Management says small cap valuations are the cheapest they\u2019ve been in 15 or 20 years
\nRed Leaf Securities says \u20182024 will be the year of the small cap recovery\u2019 after two tough years\u00a0<\/p>\n
Despite somewhat of a sluggish start to 2024, fund managers and analysts are optimistic for equity markets, particularly the smaller end of town.<\/p>\n
Portfolio managers at Maple-Brown Abbott reckon with inflation looking like peaking and an end to the rate hiking cycle of central banks in sight, 2024 has a shot at being the best year for small caps since the Global Financial Crisis.<\/p>\n
\u201cWe believe the Australian small caps market is at an inflection point given the more favourable macro-economic backdrop and expected earnings trajectory,\u201d says Australian small companies co-portfolio manager Phillip Hudak.<\/p>\n
\u201cWith a lot of negative sentiment priced in to Australian small companies, and signs that financial conditions are easing, inflation is moderating and interest rate rates have peaked, we believe we are seeing one of the most favourable environments for the Australian small caps market to outperform in 2024 since the global financial crisis.\u201d<\/p>\n
Australian small companies co-portfolio manager Matt Griffin agrees and points to key themes that may emerge in small caps in 2024.<\/p>\n
\u201cWhile our bottom-up investment process is focused on idiosyncratic exposures, key themes we may see in 2024 include the under-estimation of wage inflation, a ramp-up in corporate activity, strengthening fundamentals in the uranium sector and potential re-emergence of the gold sector,\u201d Griffin says.
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According to S&P Dow Jones Indices<\/a> the S&P ASX 200 benchmark finished 2023 with a gain of 12%, closing just 0.3% away from a record high.<\/p>\n The S&P ASX Small Ordinaries finished 2023 up 7.82%, the S&P ASX Mid Cap 50 rose 7.76%, while the S&P ASX Emerging Companies index was just short of ending 2023 in positive territory, finishing down 0.36%.<\/p>\n Ophir Asset Management specialises in small and mid cap equities investing both in Australia and globally.\u00a0 Head of research Luke McMillan says the last two years has been a \u201creally torrid time\u201d for small cap investors both in Australia and globally.<\/p>\n \u201cYou have to go back really a number of decades to see things be as bad as they\u2019ve been for small cap investors and of course the precipitating factor was this rapid increase in interest rates,\u201d he says.<\/p>\n \u201cThat hit longer duration assets like longer duration bonds and when you\u2019re talking about the equity market pretty much the longest duration assets are small cap growth orientated companies.\u201d<\/p>\n McMillan says this rate hiking cycle has hit small caps particularly hard with the underperformance of small caps versus larges caps in the US and Australia around 20%.<\/p>\n He says while the S&P 500 and even Aussie large caps are making all time highs, the small cap variant which is the Russell 2000 in the US and S&P ASX Small Ordinaries, are still both down about 20% from their highs.<\/p>\n \u201cHistorically, it\u2019s really rare to see that bigger difference and normally even if we look at the worst part of business cycles which is recessions typically small caps underperform large caps by around about 5% on average,\u201d he says.<\/p>\n \u201cSo even though we haven\u2019t had a recession this time you\u2019ve still got this outsized underperformance of small caps which is bigger than any recessionary period going back the last five or six recessions in the US.\u201d<\/p>\n However, McMillan says the good news for small cap investors is it looks like central banks in key advanced economies are largely done with hiking rates.<\/p>\n \u201cIf you believe market pricing they\u2019re all done hiking rates now there might be a little bit of residual risk, we might have one more in some regions, but on the balance of probabilities it looks like they\u2019re done,\u201d he says.<\/p>\n \u201cAlso we seem to have peaked out in terms of long term interest rates in those advanced economies so that big headwind for valuations looks like it\u2019s largely done slamming small caps over the head.\u201d McMillan says further good news is we\u2019re now starting from cheap valuations with small caps on an absolute and relative basis compared to large caps.<\/p>\n \u201cWe\u2019re seeing valuations the cheapest they\u2019ve been in at least 15 or 20 years, \u201d he says.<\/p>\n Furthermore, he says higher wages growth \u2013 also a headwind for smaller caps \u2013\u00a0 appears to be stabilising.<\/p>\n \u201cSmaller cap companies seem to have a higher proportion of their costs in wages and just like inflation has been coming down it looks like we\u2019ve seen a peak in wages growth as well, so that is another good news story heading into this year,\u201d\u00a0 he says.<\/p>\n However, McMillan says the residual risk is that while markets tended to rally in the last couple of months of 2023 on a higher probability of a soft landing and no recession in the US and Australia, we are \u201cnot out of the woods\u201d with that probability still elevated.<\/p>\n \u201cIf we do get a recession there is undoubtedly will be more downsize for equity markets, including small caps,\u201d he says.<\/p>\n McMillan says normally small caps do fall more than larger caps in a recession but it seems to be small caps have this time priced probability of a recession higher than large caps.<\/p>\n \u201cIn fact particularly if we look at the US even if we consider that bear case and do get a recession we may actually see small caps not fall as much as large caps because they seem to be pricing it more and are much cheaper,\u201d he says.<\/p>\n \u201cThe last time we saw a recession where small caps didn\u2019t fall as much as large caps was back in the dot.com bubble associated recession.<\/p>\n \u201cIt had similar characteristics where large were a lot more expensive than small caps so they fell more.\u201d Last week an unexpectedly high inflation reading in the US sent jitters through markets. Consumer prices in the US\u00a0picked up again in December to 3.4%\u00a0(from 3.1% in November), driven by increases in costs for housing, dining out and car insurance.<\/p>\n McMillan says it may be a bumpy ride still with work to firmly control inflation in the US and elsewhere but if it can continue to decline without much of an uptick in unemployment and no recession, then it\u2019s likely we\u2019ve seen the lows for equity markets.<\/p>\n \u201cThis liquidity discount where people are taking money out of small caps and hiding in large caps you\u2019ll start see that money start to trickle back down the market cap spectrum\u2019 we think\u2019 and have that catch-up period of out performance for small caps,\u201d he says.<\/p>\n McMillan says usually its part-way through a recession the market looks ahead to earnings recovery and will tend to recover before a recession is over.<\/p>\n \u201cThen you will get the period of small cap catch up or outperformance of large caps,\u201d he says.<\/p>\n \u201cThe average recession tends to go for nine to 10 months and this might be a milder one, more like the six-month variety, and the market starts rallying partway through.\u201d Red Leaf Securities CEO John Athanasiou told Stockhead<\/em> he is confident of a positive year for ASX and global small caps.<\/p>\n \u201c2024 will be the year of the small cap recovery,\u201d he says.<\/p>\n \u201cAfter two tough years for the sector due to in a rising cash rate environment, small caps are poised to recover as cash rates start falling which reduces the cost of financing which in turn increases investors risk appetite.<\/p>\n \u201cIt is perfect conditions for a small cap recovery.\u201d<\/p>\n Disclosure: The author held units in the Ophir Global High Conviction Fund at the time of writing this article.\u00a0<\/em><\/p>\n <\/span><\/p>\n The post The best year since the GFC? These experts are ready to go big on ASX small caps this year<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"
\n\u00a0<\/p>\nCheap valuations for small caps present opportunities<\/h2>\n
\n\u00a0<\/p>\nMoney to trickle back to small caps<\/h2>\n
\n\u00a0<\/p>\n2024 the year for small cap recovery<\/h2>\n