The Point

Aussie equities: Opportunities in ASX small caps as rate cuts loom

Relative underperformance in the small cap category doesn’t bother experienced, active stock-pickers like Pendal’s Lewis Edgley and Patrick Teodorowski.

“By being dynamic and identifying better-quality smaller companies we’ve been able to navigate that and find money-making ideas,” says Lewis.

“We’ve been able to identify two groups of businesses: structural-growth businesses that we were able to put more capital in at a better valuation; and businesses with more defensive earnings than the market thought, which have rebounded significantly.”

Still, the sector should receive a broad boost when interest rate cuts arrive.

Small caps are historically correlated to changes in interest rates.

“We have a blueprint for this in many cycles, whether it’s the GFC or Covid,” says Lewis.

“Declining interest rates are usually a tailwind for small caps relative to large caps.

“Over the last two or three years, small caps have essentially been driving with the handbrake on.

“We don’t know when rates are going to start coming off. But when they do, small caps should start to get a tailwind.”

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Elise McKay: What’s driving equities this week?

The world’s most-watched company, AI chip-maker Nvidia, tumbled this week after disappointing profit guidance and a regulatory speedbump.

Is Nvidia still a buy? And what do the results mean for ASX-listed, AI-related stocks?

Even before its latest share price tumble, Nvidia’s valuation wasn’t unreasonable at around 15 per cent below its five-year average multiple, says Pendal analyst and PM Elise McKay.

“Data-centre demand remains strong and broad-based across hyperscale (the biggest data-centre customers), consumer internet and enterprise,” says Elise.

Sales forecasts in the sovereign sector have strengthened to low double-digit billions in FY25, she points out.

“This reflects desire among sovereign states to build AI models based on local datasets, language and cultures.”

Nvidia’s profit margin guidance reflected the introduction of its latest “Blackwell” chips, which start at a higher cost before reaching scale during 2025, Elise says.

Strong growth in data centre revenue (154 per cent year-on-year) is supportive for ASX-listed plays such as Goodman (GMG), NextDC (NXT), Macquarie Telecom (MAQ) and Infratil (IFT), says Elise. (Pendal holds GMG, NXT and MAQ).

Read Pendal’s latest weekly equities overview

Anthony Moran: what’s driving Aussie equities this week?

Here are the main factors driving the ASX this week according to Pendal investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams

IT’S been a bullish period for assets after the US monthly Consumer Price Index (CPI) broke its run of hawkish surprises – instead, delivering in line with expectations and validating the recent decline in bond yields and the US Dollar Index.

We also saw a continuation in the run of softer, but not disastrous, economic news – reinforcing the narrative’s switch back from “no landing” to “soft landing”.

In response, US equity markets hit fresh highs; the S&P500 gained 1.60%, the S&P/ASX 300 rose 0.98%, while commodities and bonds also moved higher over the week.

As a result of recent data, the market is now pricing 45 basis points (bps) of rate cuts in the US this year – with an 85% chance of a first cut by September.

At the same time, the Atlanta Fed GDPNow tracker estimates that the US economy will grow 3.6% in Q2 2024.

On balance, this combination is positive for markets and – given the slower pace of change in the data – may support this environment through the Northern summer.

However, Federal Reserve Chairman Jay Powell noted that while he expects inflation to come down, his confidence is not as high as it had been and that it may take longer than expected for restrictive policy to help bring inflation down to target.

So, bond yields overshot in mid-April, but it is hard to see them moving much lower from here in the short term given the large pullback from peak.

We also need to keep a close watch on company earnings for any sign of impact from a slowing economy.

Elise McKay: What’s driving equities this week?

THE market saw big moves last week, driven by a collision of shifting central bank expectations, an improved growth outlook, overbought technicals, rotational pressures, and increased odds of a second Trump presidency.