Persistently volatile market conditions giving rise to a high inflation-high interest rate environment have continued to afford active players in the small and micro-cap space an attractive opportunity for investors looking beyond indices.
That is the conclusion drawn by Prime Value Asset Management’s Richard Ivers, who said those looking ahead can capitalise on quality opportunities primed for future outperformance in the medium-to-long term at a discount now.
“The Small Industrials Index experienced a surprisingly sharp fall in the last few months and is now only +6% in the last six years since the onset of Covid, which equates to 1% per annum. This is despite solid earnings growth over the period,” he said.
“Unsurprisingly, there are now many quality smaller companies with resilient earnings which now look more attractive over the medium-to-long-term.
“There are plenty of small and micro-cap companies with relatively reliable earnings well into the foreseeable future, such as those tied to critical infrastructure, which appear more attractive during times of volatility.
“And while this short-term volatility creates some discomfort, it can provide the grounds for future outperformance by providing access to quality companies on sale.”
Ivers noted investors could lean into opportunities presented in particular by infrastructure assets “operating as monopolies” with long duration earnings, especially during periods of economic volatility.
“These companies include Auckland Airport and Napier Port, with earnings that stretch well beyond shorter term interest rate and oil price rises, and have sold off in recent weeks,” he said.
“In addition, there are many small cap companies benefiting from strong structural tailwinds supporting longer term growth – companies such as Regis Healthcare and Pinnacle Investment have a strong long term earnings growth outlook. Both are high quality businesses and down over 30% from recent highs.
“We believe it’s important to focus beyond the short term, and we are more optimistic on the longer term with these companies.
“It’s uncertain when the market will rebound, but it’s typically rapid when it happens, so in our view you invest when the opportunity presents. This is what we’ve been doing while remaining focused on higher quality businesses that can withstand shorter term cyclical headwinds.”
Source: Financial Newswire