Why small cap investors aren’t waiting for starter’s gun on interest rates

Mike Younger

Small cap stocks seem poised to benefit from the shifting interest rate landscape, yet while markets await more evidence of a potential cut there remain plenty of good opportunities to invest in smaller companies, according to Mike Younger, Portfolio Manager for the small cap Prime Value Emerging Opportunities Fund.

Mr Younger said the key to longer term success in small cap stocks is to invest through the cycle, but local small cap stocks are at an interesting juncture as the market looks for evidence of an impending rate cut. “With interest rate cuts widely forecast for 2025 you can see that catalyst coming. We’re not sure when it might happen, but we know smaller stocks tend to jump out of the blocks.

“Data shows small cap stocks are the first movers in a rate cutting environment, and can provide significant outperformance.

“We also know small cap stocks have some ground to make up compared to their large cap counterparts. But it’s crucial not to get too caught up in the short term.”

While higher interest rates have caused the small cap indices to underperform, several quality companies have still been doing well, a fact reaffirmed during the last reporting season. “In small cap investing there is always the opportunity to find quality, resilient companies in any market.

“Smaller companies offer more diversification than larger cap stocks, offering a bigger investment universe. There is always something interesting to look at, and this was underlined during the last reporting season where several quality companies surprised on the upside, including Regis Healthcare, Breville Group, and Chorus.

“While small cap stocks as a group may fluctuate on economic shifts there are many resilient smaller companies with resilient earnings, which can deliver consistency over time. Investors can do well targeting these stocks rather than just waiting for an interest rate rally.”

He said investing through the cycle allowed canny managers the opportunity to buy in to quality companies at attractive valuations. “It’s well established that volatility brings opportunity in smaller companies. Those dips in valuations give us the opportunity to buy great companies on sale.”

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 around $3 billion in equities, income securities, direct property and alternative assets.