By Cecile Lefort
As global equites flirt with record highs and investors shrug off the unpredictable nature of US President Donald Trump’s trade policies, local fund managers are banking on interest rate cuts to push the smaller end of the sharemarket even higher.
The Reserve Bank of Australia has already cut the cash rate twice this year to 3.85 per cent, with at least two more tipped by Christmas. Hopes for further easing, along with a trade truce between the US and China, propelled the S&P/ASX 200 Index to a fresh high on Wednesday.
While the S&P/Small Ordinaries index is still trading about 10 per cent away from its 2021 peak, the gauge has still jumped 18 per cent from its recent low in April as investors piled back into the sharemarket.
Speaking at the Morgan Stanley Summit in Sydney this week, fund managers from Ausbil, Wilson Asset Management, and Perpetual named their stock small caps picks.
Arden Jennings, a portfolio manager at Ausbil, named Generation Development Group, which provides specialist financial products, and has already rocketed more than 60 per cent on the ASX this year.
“As we know, in small caps, it’s part art and part science, and we like people-focused businesses,” said Jennings, who has been tracking the stock for almost a year.
He also likes Grant Hackett, the three-time Olympic gold medallist who recently became Generation Development Group’s chief executive after it acquired research house Lonsec. Jennings said the business had moved on from its early days in life insurance and he’s particularly keen on its managed accounts unit.
“It has more than doubled over the last four or five years, and we see it double again in the next five years. It’s a huge structural tailwind,” Jennings said.
The highly fragmented industry also helps his investment case, where the top two players share only 20 per cent of the entire market. “So their dominance over the other smaller players means they are able to provide a scale for clients at a reasonable cost,” he said.
‘Very unique’
TPG Telecom Singapore, now known as Tuas, was the stock pick for Tobias Yao, a portfolio manager at Wilson Asset Management.
Now third-largest communication company in Australia, the fund manager praised Tuas’ quick expansion, which he said had not harmed its profit margins.
“It’s something very unique that it has, being able to start from zero market share to 12 per cent now. Their earnings margin is more than twice that of most of the large players, even at half the size,” Yao explained.
“They’ve done this incredible job of growing very comfortably in the last four years, and it will be even more exciting when they tackle the mass market,” he said.
The fund manager said he expected Tuas’ expansion to continue because its business model could be easily replicated in other regions, and its technology was much cheaper to run than its rivals.
Even though its valuation is high – the shares have jumped 44 per cent in the past 12 months – Yao believes it’s still a good bet.
“It’s very hard to find companies that are growing at 20 per cent plus with more than 40 per cent EBITDA margin in the current market,” he said.
‘Now is the time’
James Rutledge, a portfolio manager at Perpetual, picked oOh!media as his top choice. That’s because Australia’s largest outdoor media company, which is at the whims of the advertising industry, is set to play catch-up as borrowing costs fall.
“We think that now is the time to be selective in terms of going back into these [cyclical] stocks,” he said. “We’ve seen a couple of interest rate cuts already and perhaps a few more, and we like to back a business that has that structural tailwind that oOh!media has.”
A key reason for Rutledge’s bullish outlook is the company’s technology, which he said allowed it to tailor its products based on who was viewing it at different times of day – one static billboard can change advertisers five times a day.
“That’s a real attraction for the advertising, which can be far more targeted,” the portfolio manager said.
He noted that when oOh!media first listed on the ASX, around 20 per cent of its revenue came from digital sources; that figure had now climbed to about 75 per cent, which was generated from only about 35 per cent of its assets.
“There is still some potential there for oOh!media,” he concluded. Year to date the shares have jumped 42 per cent.
