‘Tough’ reporting season could see small cap surprises as quality shines through
Richard Ivers
Quality smaller companies could potentially be the beneficiaries from the toughest reporting environment in a few years, according to Richard Ivers, Portfolio Manager for the small cap Prime Value Emerging Opportunities Fund.
Mr Ivers said an ability to sort the wheat from the chaff this reporting season could deliver some good buying opportunities, but he expected a choppy season ahead. “Investors will be rewarded by being more selective in smaller companies as the earnings risks in the economy have heightened.
“Some of the quality smaller companies are doing well, following a ‘risk-on’ period in late 2023 and early 2024 which lifted all boats. There are going to be opportunities in these quality companies across reporting season.
“Early indications are that there could be some surprises among companies with previously weak results from earlier this year surprising on the upside.
“We’ve already seen some quality bounce very hard when the outlook was better than expected, but whether this becomes a broader trend remains to be seen.”
Ivers said many parts of the market are in cyclical slowdown, which could bring potential buying opportunities. “We’ve seen softening across retail, advertising, and the household sector.
“As we know from past experience, these cycles can bring opportunities to buy ahead of the next upswing.”
Mr Ivers said a massive rotation into smaller cap stocks in the USA is yet to play out on the Australian market. “There has been massive momentum into small caps in the USA, partly inspired by the lower inflation numbers over there, and while our market often follows the USA the circumstances are currently very different.
“US markets are moving in anticipation of a potential interest rate cut, whereas we’re on a different rate cycle than the USA.
“Interest rates were hiked earlier and higher in the USA, and are expected to cut sooner. If the Fed cuts rates later this year there is potential our market will follow a similar path and we’ll see a greater rotation into small cap stocks – though it will be delayed.”
The Prime Value Emerging Opportunities Fund has delivered 11.1% after fees per annum to investors since inception in 2015. It is rated Highly Recommended by Zenith.
Prime Value Asset Management was founded in 1998 and is part of an investment group including Shakespeare Property Group, managing over $3 billion in equities, income securities, direct property and alternative assets.
