Hear the latest from Sam Twidale, Portfolio Manager for the DNR Capital Australian Emerging Companies Fund as he provides his thoughts on the outlook and opportunities for the Australian Small Cap sector.


Okay. So looking at the outlook and opportunities in Australian small caps at the moment, I think obviously lots of focus at the moment on, on the short term macro outlook. You know, what’s happening with inflation, what’s happening with interest rates, our central banks going to pivot, slow down the pace of interest rate increases. So a fair bit of uncertainty here, and that’s obviously affecting investor sentiments. But I think in this kind of environment where’s lots of focus on the short term, important to take a step back and really focus on where are the longer term opportunities, you know, where can we take advantage of the volatility that we’re seeing in the market here. And I think thinking about that it’s important to think about this sort of regime change that we’re seeing in the market because we are shifting towards this more, you know, more inflationary environments.

Inflation could come back, but we could still see persistently elevated levels and we are seeing higher interest rates, potentially for longer as well. And that does have, you know, significant implications for portfolio positioning. The types of companies that are performing well in this type of environment because, you know, in recent years we have seen many businesses thriving in that low interest rate environment. Lots of risk taking, some of the more speculative areas did very well. A and we are seeing that unravelling now, especially in technology online, even consumer discretionary as well. Many companies have been overrunning significantly in an environment of low, low rates. And, you know, it could be the wrong strategy just to buy the dip in these types of companies because we might not see those conditions come back for some time.

You know, very low inflation, very low interest rates. So this shift in market leadership is something we’ve been really focusing on. You know, what are going to be some of the new growth drivers going forward? Where are we gonna see that rotation into looking out over the next five years? And, you know, we think there’s going to be some great opportunities emerging. This is gonna be a great environment for bottom up stock picking for active management because there’s gonna be a lot of dispersion, we think under the surface. We think there’s gonna be some great opportunities in that more tangible side of the economy. You know, we’ve seen a lot of investment in intangibles being out pay, building out payment processes, you know, buy now pay later platforms in recent years, you know, the online businesses that needed those low interest rates, investor appetite to fund those businesses.

But that tangible side of the economy’s been starved of investment and, and we see some great opportunities emerging there. I think especially in that sort of commodity side, energy, CapEx, I think that could be a real, you know, growth driver going forward. You know, I think commodities, some of these commodities exposed to decarbonisation, you know, clearly face a very attractive long-term outlook. There’s gonna be some volatility in, in the short term, definitely with what’s happening with the economy, but I think that presents the opportunity for longer term focused investors to buy on weakness there. I think if we look at some of the companies exposed to those themes, you know, we like a company like Mono leading engineering, construction, maintenance services business. You know, that’s a business that’s been through us downturn over the last 10 years. Earnings currently one third of the previous peak margins, half the previous peak. So a lot of recovery potential there. And they’re seeing that pipeline rebuilding from their customers. And I think that’ll really benefit from that pickup and investment in those commodity related sectors. We like the cash generative commodity producers as well. I think they look very well placed, especially exposed to lithium, copper, rare earths, especially those high quality producers generating strong cash flows and companies like IGO, Alchem, Linus, Rare Earths. And we’re also looking around, I think for, for these good quality businesses that are derating on these short term concerns. I think whenever you have concerns around the short term outlook, you can pick up businesses very cheap. When the market’s focusing on the short term, it presents a good opportunity for longer term focused investors. You know, company like Pexa, leading digital property assessments, exchange, you know, that’s a business we think is very well placed, long term.

A lot of resilience in their earnings generates very high margins, generates good cash flow leading position in Australia, and a great opportunity to expand their business overseas in the UK. We’re still early days, but there’s, they’re showing some good traction. We like businesses as well with, you know, good resilient earning streams that can get through this difficult period. You know, a company like IP leading intellectual property, attorney firm, you know, that’s a business that generates very, very strong cash flow. Great pricing power can offset any cost pressure that they’re currently seeing. So, you know what we continue to focus on really, you know, building together a concentrate portfolio. High quality businesses, which we think are attractively priced, uh, portfolios trading very cheaply. It’s only on about 10 times earnings currently, you know, well below the index on 14 times. So we are in the more value area areas of the index.

You know, the, the companies we think offer great value for investors and we are sort of more defensively positioned still. I don’t think we’re out the woods yet. I think there’s still some uncertainty going forward. We’ve had this big valuation rebased lower for many stocks. But I think earnings is, it’s gonna be a bit more tricky going forward. Central banks really trying to cool the economy to slow it down, to bring inflation levels down. And I think we’re gonna see the flow on the impact to earnings for many companies that have been over earning in recent years. We’re already starting to see that now every day we’re coming in more downgrades coming through from companies. So I think know the elevated cash that we we’re holding currently that will present opportunities to deploy into the market in the coming months, when we see this, you know, ongoing volatility. So I think that’s where we’re seeing the opportunities currently. You know, continue to have concentrated portfolio focused on the more value areas of the market, resources, energy, some of these high quality industrials, you know, good quality businesses with good pricing. Power is really our key focus right now.


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