Kevin Toohey
Asset consultancy firm, Atchison delves into the evolving landscape of Australian small caps in their newly released Quarter One 2024 Tactical Asset Allocation Outlook, including its impact on their approach to credit.
Atchison Principal Kev Toohey says, “The potential resurgence of Australian small caps is characterised by market capitalisations ranging from $50 million to $500 million.”
Toohey underscores the challenging performance of the S&P/ASX Small Ordinaries Index in recent years, with a historic -20.7 percent decline in 2022. This was followed by modest gains of +4.72 per cent in 2023.
Remaining optimistic for the forthcoming two years, Toohey cites factors such as moderating inflation, alleviating cost of living pressures, enhanced consumer sentiment and supportive business borrowing, alongside the potential for a Chinese stimulus package.
Toohey anticipates rate cuts from September 2024, while acknowledging the persistent challenge of inflation. Therefore, emphasising Atchison’s conviction in early tactical investment and prioritising a larger margin for safety.
Atchison Principal Kev Toohey says, “We have added to our Australian small cap exposure, doing so via active managers where we see attractive conditions for security selection to add value above index.”
Performance of Australian Small Caps
Reflecting on historical performance and the cyclic nature of Australian small caps, Toohey notes declines of -6.8 percent in 2014 and -11.3 percent in 2018. However, each downturn was followed with three years of gains, informing Atchisons cautious yet optimistic approach to exposure levels.
Focus on credit exposure
With threats looming over spread being at the low end of their value range, exposure to credit is taking precedence for investors.
Toohey concluded, “We believe that with yields where they are, the returns on investment grade credit (IG) are too good to ignore for most investors, avoiding the need to chase returns further down the credit quality spectrum.”