Richard Ivers and Mike Younger are a part of the Prime Value Asset Management team which won the Zenith Small Caps Award at the end of last year. A crap year it was, so well done.
Here, they give Stockhead exactly Two Minutes of Wisdom.
Been a decent 2023 you’d have to say. First things first, can ASX small caps continue their run?
Mike: I would expect the small cap index to follow the US market direction near-term, which is currently reacting positively to reduced inflation prints.
While we expect economic conditions to weaken through the year as interest rates continue to rise and fixed rate mortgagees roll over into higher variable rates over the next year, the upcoming reporting season may not reflect this.
Themes and sectors. Where are you positioned right now?
Mike: We remain defensively positioned in stocks with pricing power. Here we’re talking, solid, reliable: insurance brokers, profitable software, real estate portals, infrastructure plays…
Richard: With an eye out for adding more cyclical exposure as the path forward becomes a little clearer.
A few names if you will, any of the unsung caps out there grabbing your attention?
Richard: We like News Corp (ASX:NWS) and believe the possible sale of Move for US$3bn (c. 20% of NWS market cap) could be a significant catalyst for the stock given there is little value for Move reflected in the NWS stock price.
Mike: We expect stocks like Helloworld (ASX:HLO) will show strong momentum in their result, while Domain (ASX:DHG) is being impacted by weak real estate listings but represents very attractive value on a longer term basis.
A little macro background, if you will… what’s front of mind right now?
Mike: Inflation continues to dominate the headlines, with the US having peaked and Australia likely to shortly. As such, interest rate expectations are reducing and economic data remains positive, with markets reacting favourably. I am a little cautious, however, that the excess savings created by COVID stimulus has been expended in both markets, and that higher rates could lead to higher unemployment.
Add in the fixed rate mortgage cliff ahead (in Australia), and this could drive down household spending in the months to come.
Richard: Yeah. We’re cautious on retail in 2023.
Richard and Mike. How’s your confidence levels heading into the rest of the year?
Mike: While I’m cautious in the near-term given the above factors, I am confident on the outlook for Small Caps through the back half of 2023 as the path forward becomes clearer. What we do know is that Small Caps historically lead the market out of a downturn, and given how hard they were hit in 2022, we expect this to hold true in 2023.
Richard: That’s why stocks like Domain are interesting. If you’re willing to take a longer term view it represents very good value.
…oh, will the next reporting season provide any direction?
Mike: Consumer spending remains robust as indicated by recent retailer trading updates (and here we’re thinking Super Retail Group (ASX:SUL), Accent Group (ASX:AX1).
Employment data continues to be strong, and so we don’t expect companies to have yet felt a change in sentiment. As such, there may not be as much to take out of the upcoming reporting season as we had hoped.
Richard: Wait. Just on reporting season… there have been some pockets of softening, nothing radical. Sectors like media advertising.
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