Maple-Brown Abbott’s Australian Small Companies Fund co-portfolio managers, Phillip Hudak and Matt Griffin, express optimism for the Australian small-cap market, citing better-than-expected results and a resilient domestic economy.
“There were several positive results, with upwards earnings per share (EPS) revisions triggering share price rises for many small caps, and we note that reactions to company announcements have been more elevated than what we have seen in previous reporting seasons,” said Hudak.
Consumer discretionary sectors, including companies like Breville Group, ARB, and Adairs, have shown surprising resilience, the portfolio manager said, with top-line sales outperforming conservative assumptions.
“The consumer discretionary sector was the big surprise given more resilient top-line sales relative to previous conservative assumptions. This, combined with easing input costs, has allowed retailers to continue to clear excess inventory without elevated promotional activity.”
As such, Maple-Brown Abbott believes that Australian small caps are positioned for a significant rebound over the next two years, outperforming larger counterparts.
Favourable valuation metrics, forecasted earnings upside, and signs of easing financial conditions contribute to their positive outlook, alongside the potential easing of interest rates by the Reserve Bank of Australia.
“For investors who may have missed the bottom a few months ago, we believe that it is not too late to buy into the sector. We are seeing substantial interest from advisors and investors in small-cap stocks, but they are not necessarily increasing their allocations to that interest. We think that eventually, allocations will catch-up,” Griffin said.
The fund managers also anticipate continued mergers and acquisitions (M&A) activity in 2024, supported by a lower Australian dollar and potentially lower interest rates, after the recent reporting season witnessed notable M&A actions, including bids for CSR, Boral, Altium, and Superloop.
“With the lower Australian dollar, we believe M&A activity will continue to create opportunities in the Australian small-cap sector and be far more pronounced than IPO activity which is also expected to ramp-up,” Hudak said.
“Many companies, particularly at the smaller end of the market, could see M&A activity as the year continues. Spartan Resources, for example, is a potential takeover candidate and also a key stock pick given our bullish view on gold.”
Several thematic trends are also driving small-cap companies, according to the portfolio managers, with companies like NEXTDC, Megaport, and Macquarie Technology Group benefiting from the rising interest in AI stocks.
“In terms of our portfolio, we have invested in medical imaging company Pro Medicus because we think the integration of AI in the radiology imaging area will create significant advances in imaging technology and upside for this company,” Hudak said.
Moreover, the rebound in lithium prices has boosted lithium miners, presenting opportunities for companies like Patriot Battery Metals.
The fund managers also highlight potential in the gold mining space, focusing on companies like Genesis Minerals and Perseus Mining.
“We’ve seen a recent drop in price of some gold miners which has opened up opportunities. At the same time, demand for gold is strong, particularly from central banks. Gold could also benefit from lower interest rates throughout 2024 and we are focusing on companies that continue to deliver production growth, meet cost guidance, and build cash reserves such as Genesis Minerals and Perseus Mining,” said Griffin.
Maple-Brown Abbott also anticipates a rise in the uranium price, benefiting companies like Boss Energy and Paladin Energy, while the shift to electric vehicles (EVs) is fuelling growth for car dealers and fleet/novated leasing companies, with Smartgroup among the major beneficiaries.
However, despite these positive trends, rising wage inflation may pose challenges for some companies, particularly those unable to pass on price increases. As such, Maple-Brown Abbott is strategically investing in companies with pricing power, such as TechnologyOne and Monash IVF Group.
Ultimately, the pair agreed that robust reporting season and prevailing market conditions signal a promising trajectory for Australian small caps, offering opportunities for investors seeking growth in 2024.
