Small caps are off the leash and taking on the ASX200, say experts
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Small caps are finally off the leash and getting a run, beating the ASX 200 index over the past month.
The Small Ordinaries, the ASX’s small caps index, was 3.78 per cent higher than the ASX 200 at the end of Friday.
It’s been a combination of more confidence on the back of good economic data, and the large end of the market looking toppy.
“Small caps have underperformed over the last couple of quarters and I think now there has been a recycling of capital back into the small cap sector,” Tulla Private Equity CIO Kevin O’Hara told Stockhead.
“The NASDAQ is trading at all-time highs as are a number of the large caps and so investors are seeking opportunity in beta stocks.”
All of the US markets are touching record highs and while the ASX 200 closed down 0.76 per cent on Friday, it’s still at the top end of its 52-week trading range.
The Small Ords run is being driven by commodities prices, specifically “new age metals”, says Xcel Capital’s Edwin Bulseco.
He says investors are taking a punt on commodities companies which have been “beaten up”, with copper, lithium and cobalt prices driving the resurgence.
At the end of August gold went over $US1300 an ounce for only the second time in the last 12 months (the last time was a moment in November last year). Cobalt companies have been taking off as have lithium miners.
Lee IaFraté, executive chairman of Armytage, says money that flowed into larger companies in these areas is now starting to cascade into the smaller, and the more speculative businesses.
While the Small Ords may be pumped up on investor confidence and a lack of bigger opportunities, it’s also getting a paper boost by declines at the big end of town.
The ASX 200 is being dragged down by the banks, which have Commonwealth Bank to blame for dragging down their sector and which make up just over 35 per cent of the index, and Telstra which is down 14 per cent over the last month.
One result of this rising exuberance for small caps is that it may herald a recovery in the IPO market.
RM Corporate Finance’s Nathan Barbarich says the last 12 months have been rubbish for IPOs, as investors have suffered from deal fatigue after a big year for listings in 2015.
Mobilicom listed in May and is still underwater, and only three of 11 companies that listed since July are trading above the listing price.
The rising confidence now could mean more support for IPOs after they float.
Barbarich says that given the commodities boost the focus will probably be on resources IPOs in the next six to 12 months.
However, he also says that since the mining boom slowed there have been plenty of mining shell companies to backdoor list into and investors have had to look for other places to spend their money.
Tech companies have benefited from these factors, and they’ll be part of the mix too.