Rory Hunter
Small-cap gold and critical mineral miners could benefit from a multi-year resources cycle, underpinned by rising artificial intelligence investment and energy transition needs, according to Rory Hunter, head of emerging and small companies at SGH, while rising interest rates could weigh on small industrials over the shorter term.
“The opportunity in critical minerals today is one of the most compelling themes we see anywhere in global markets”, he said. “The structural drivers behind it are powerful and we expect that to continue in the years to come.
According to Hunter, Australian small companies stand to benefit, with many critical minerals and gold miners listed on the ASX.
“Resources make up more than 30 per cent of the S&P/ASX Small Ordinaries index, and that’s where we see a significant portion of the opportunity. The long-term tailwinds in gold and critical minerals look very durable,” said Hunter.
“If you look at global trends, the sheer scale of AI-related capital spending and the energy generation and transmission build out required to support it, the demand profile for key commodities like copper, silver, uranium, and a suite of more niche critical minerals becomes increasingly strong.
“Add to that the fact that China is increasingly weaponising supply, you have the ingredients for a sustained period of outperformance in the very resources-heavy small-cap index. These stocks are under-owned relative to their small-cap industrial counterparts, so there’s plenty of room for them to move significantly higher and see a substantial re-rating.”
Reflecting Hunter’s bullishness, prices for silver hit record highs in early December around US$58.84, according to Bloomberg. Copper also rallied to a record of US$11,334 a ton on the London Metal Exchange on 1 December.
Investors have been bullish on copper because of its key role in the clean energy transition, with the critical metal up nearly 30 per cent this year. Uranium prices have also rallied this year.
“The supply-demand dynamics favour ongoing gains in critical minerals companies. AI capital spending, energy generation, energy transmission, and potential productivity improvements will underpin commodities demand. Coupled with the supply-side factors with some supply deficits which drives our bullishness in what could be deemed as a new commodities super-cycle.”
In contrast, the outlook for industrial companies is less bullish, according to Hunter. The potential for a rise in interest rates given Australian inflation is back above the central bank’s 2 per cent to 3 per cent target band could see interest rates rise over the short to medium term, putting pressure on the value of small-cap industrial companies.
“In the near term, there is a consensus view that the path of least resistance for interest rates looks to be potentially higher. That creates potential headwinds for small industrials, which are fully priced but also very well owned.
“Despite those potential headwinds, we do expect that small caps have the potential to continue their outperformance. But it could just come in a change of leadership, moving to resources, away from industrial companies,” said Hunter.