The COVID-19 pandemic has thrown up one of the most unique investment environments in recent memory.

And in the wake of that disruption, it helps to get an idea of how the experts are looking at opportunities (and threats) in ASX small caps.

Stockhead caught up this week with Ron Shamgar, the head of Australian equities at fund manager TAMIM Asset Management.

Always helpful with a quote or two, Shamgar provided plenty of useful insights into what stocks and sectors are best placed to outperform in the wake of the pandemic.

He also shared his view on BNPL stocks, and how the macro environment is shaping up for stock investors in the months and years ahead.

Stockhead: How did TAMIM respond to the initial crisis in March? Was there much reallocation of capital during the selloff, or in the immediate aftermath?

Ron Shamgar: When the COVID crisis was emerging during late February and through March, it was definitely a confusing period for investors — and for us.

Our companies were reporting overall strong results, and during our meetings with them back in March, the management teams weren’t seeing any impact on their business. Yet their share prices were tumbling.

In that environment, we took the opportunity to accumulate some shares in companies where we felt didn’t have as much exposure to the potential impact of the situation. We also sold out of companies that we felt had higher risk of bad debts and falling consumer spending.

Then finally during April as lockdowns took full effect, we repositioned the portfolio to companies that were benefiting from people staying at home and shopping online. Companies such as Jumbo Interactive (ASX:JIN), (ASX:KGN) and Marley Spoon (ASX:MMM) are some examples.

SH: Your recent research highlighted the online sales tailwind for RedBubble (ASX:RBL) and Adairs (ASX:ADH). Are there any other sectors where the impact of the pandemic has changed your long-term outlook?

RS: We are of the view that COVID has structurally changed the way people shop and pay. We also believe as a result of working from home the demand for data and connectivity will only increase.

Hence we favour retail companies with a high proportion of online sales (RBL, ADH, City Chic Collective (ASX:CCX)  and Shaver Shop (ASX:SSG), payments companies such as EML Payments (ASX:EML) and PushPay (ASX:PPH), and merchant terminal providers such as SmartPay (ASX:SMP).

In the telecommunications sector we have large exposures to high-growth profitable providers like Spirit Telecom (ASX:ST1), Uniti Group (ASX:UWL) and MNF Group (ASX:MNF).

SH: Within those broad sector trends, are there any other companies you can highlight that look undervalued compared to their fundamentals and growth opportunities?

RS: Within retail I think the market will be pleasantly surprised with Shaver Shop’s results and trading update. Their products tend well to online shopping.

In the payments sector, EML is shifting away from gift card sales and into powering the emerging fintech companies that will disrupt banking and payments for the next decade.

And in telco land, we are backing the high-energy CEO of ST1 (Sol Lukatsky) to consolidate a fragmented sector, and build a national provider of modern telco services to small businesses.

SH: What are your thoughts on the BNPL sector. Have share prices run too hard there, or are they reflective of a broader shift in shopping patterns? What would you say to someone who was thinking about investing in BNPL in the wake of the post-COVID rally?

RS: We are bullish long term on the BNPL sector. We believe instalment payments are here to stay, and will replace credit cards over time as the Generation Y consumers take over.

Australian companies have emerged as the clear global leaders in this space, and it has so far been proven that it is not easy to compete with them.

Although the share prices have run hard in the short term, we think growth rates will continue as the opportunity globally is in its infancy.

Sector consolidation is inevitable and our top pick is Sezzle (SZL) where we believe it is the fastest growing pure play company in the North American market. We think it’s worth $10+ in the next couple of years.

SH: What are your thoughts on the macro environment, as it relates to stock investing? Governments and central banks have been forced to provide historic levels of stimulus — do you think that presents any macro risks, or will the policy environment remain supportive for stocks in the short to medium term?

RS: In the short term we are expecting volatility to continue as investors react to mixed economic data, further virus outbreaks and an uncertain US election outcome.

After such a strong run up in share prices in the last few months we welcome some consolidation or a pullback. We think stock picking will play a key part in outperforming the general market.

Medium to long term we are extremely bullish on equities. We think the zero interest rate environment is here to stay for many years to come and historical valuation multiples are not a good comparison tool for current valuations compared to historical ones.

Investors will eventually look for better returns than cash, and equities are the only available option as property might struggle as consumer credit remains tight.

We believe governments here and overseas will continue to do whatever they can to stimulate their economies and won’t let the economy fall off the proverbial cliff.

So in summary, we expect short term volatility but more upside over the next few years with picking companies in the right sectors as the key to outperformance.