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Rotation to large caps ‘uncomfortable’ but creating opportunities
ST Wong, 22 May 2017
The rotation away from quality to large cap stocks, which has defined the last six months on the Australian equities market, has been painful for many investors but more opportunities are appearing as a result.
The rotation has been uncomfortable and created much uncertainty, which can cause investors to panic.
It creates uncertainty into how certain companies are valued, particularly impacting quality mid-cap and small-cap stocks. This was especially so in late 2016 when the rotation caught many investors by surprise.
But we are now seeing how important it is for investors not to ‘throw the baby out with the bathwater’ and over-react, as more buying opportunities are unearthed.
As for how long the rotation will last, it is anybody’s guess. The rotation might have some way to go and we are certainly aware of that. We are slowly picking through these ideas that we have in the pipeline.
Crystal-balling in these situations is pointless. At this stage, we don’t expect a wholesale buy in the small cap sector.
We think the best way forward is to focus on individual companies, which are well-managed with sustainable earnings and attractively valued.