This graph shows why the small guys are so hot right now on the ASX
Link copied to
Surging resources small caps — along with selected tech stocks — have pushed the ASX Small Ords sharemarket index to seven-year highs as investors hunt stocks with strong growth potential.
The Small Ords index hit 2845.9 on Monday — its highest point since 2011 and a gain of 20 per cent over the past year.
That compares with a gain of about 6 per cent for the large cap All Ordinaries.
Resources stocks have benefited from speculative investor interest in lithium and cobalt — thanks to the tech metal boom. The rising oil price has also lifted energy stocks with interest helped along by merger activity, such as last week’s bid for Sino Energy.
And selected tech stocks have been popular as investors hunt for local outfits that can show high growth prospects.
The shift across to cloud computing in particular holds out the promise of big growth as the corporate sector is forced to outsource more activity while slashing costs as the impact of new technology bites.
Sebastian Evans, chief investment officer at small cap specialist fund manager NAOS, says the share market over the past 12 months has been largely driven by “momentum” as smaller resources and early-stage tech stocks have drive the market higher.
Here’s a graph comparing the ASX Small Ords (green) and the All Ords (red) indicies over the past year:
(The Small Ords index is a bit of a misnomer, Mr Evans points out, because it includes big companies such as Whitehaven Coal which is worth $5.5 billion, Reliance Worldwide with a $3 billion market cap and NIB at $2.5 billion.)
“With the low cash rate there is more money flowing into speculative investment due to the volume of money floating around the market,” Mr Evans told Stockhead.
“Also, people have seen the so-called FANG stocks in the US — the likes of Facebook and Amazon — and some people are looking for local stocks that can replicate those moves.”
But, he cautions, “for every one great stock there are 50” that are no good.
At the same time, companies that have been able to demonstrate they have a growth “platform” have enjoyed stellar market gains, while smaller microcap stocks have been largely overlooked as investors chase easy profits.
“Platform stocks such as HUB24 and Netwealth are nudging record levels,” Mr Evans said, benefiting from investor interest in ‘platform-type’ tech stocks while there was a lack of activity in microcaps due to their perceived growth profile.
Hub24 (ASX:HUB) for example, has seen its share price surge from around 80c four years ago to recent highs above $15.
While Netwealth (ASX:NWL), which floated only recently, topped $9.50 — well up from initial trades at around $5.30.
“The focus is on perceived growth: businesses showing a lot of blue sky have outperformed a lot. But that will change. When the capital spigot is turned off, that will change.”
“It is all about the probability” of when interest rates will begin to rise, he said.