In the unpredictable political and macroeconomic landscape of 2024, Maple-Brown Abbott has identified Australian small caps as a potential opportunity for investors, along with emerging markets and global listed infrastructure.
The fund manager believes it is seeing one of the most favourable environments for domestic small caps to outperform in more than 15 years.
“We believe the Australian small caps market is at an inflection point given the more favourable macro-economic backdrop and expected earnings trajectory,” said Phillip Hudak, co-portfolio manager, Australian small companies.
“With a lot of negative sentiment priced into Australian small companies, and signs that financial conditions are easing, inflation is moderating and interest rate rates have peaked, we believe we are seeing one of the most favourable environments for the Australian small caps market to outperform in 2024 since the Global Financial Crisis.”
According to Matt Griffin, co-portfolio manager, Australian small companies, key themes that may emerge in small caps this year include strengthened fundamentals in the uranium sector, a ramp-up in corporate activity, a potential re-emergence of the gold sector, and the underestimation of wage inflation.
Similarly, the fund manager sees opportunities in global listed infrastructure, although it warned of a potentially unstable year ahead.
Justin Lannen, co-founder and portfolio manager, Maple-Brown Abbott global listed infrastructure, explained: “Real yields have recently reduced and the global economy looks to be slowing which should benefit defensive essential service assets like infrastructure relative to more economically sensitive asset classes.”
While inflation is on a downward trend, it remains unpredictable, making embedded inflation pass-throughs in infrastructure a valuable feature of the asset class.
As such, Steven Kempler, co-founder and portfolio manager, Maple-Brown Abbott global listed infrastructure, said: “We continue to favour monopolistic infrastructure assets that are trading at attractive discounts to our internal valuations, protected by regulation or strong contracts, coupled with inflation linkage.”
Other bright spots lie in companies that play a role in themes such as digitalisation, the energy transition, and electrification of society.
Looking at emerging markets, the fund manager believes many emerging market governments, such as Brazil, are well placed to stimulate growth as they have maintained fiscal discipline, moved early on rate rises, and been ahead of the curve in fighting inflation.
Similarly, Chinese equities could remain a contrarian opportunity given valuations are within 10 per cent of their 20-year lows.
“Three years of equity market declines have left the market cheap, unloved and under-owned. From an equity market return perspective, experience tells us that things only need to be ‘less bad’ to see animal spirits kick in and stock prices move higher,” said Will Main, Maple-Brown Abbott head of Asia.
“We are optimistic on the outlook for China and believe there are a number of attractive opportunities for investors.”
Still, he cautioned against investor exuberance when it comes to artificial intelligence in this area.
“AI was a major reason why Taiwanese equities performed strongly over 2023. However, there are signs that near-term expectations have moved ahead of what can (or will) be delivered.
“Taiwanese mid caps, which contain a large exposure to the AI thematic, rose more than 40 per cent in 2023. Forecast earnings for this cohort were largely unchanged and multiples now sit at 15-year highs, leaving little margin of safety,” Mr Main said.
On the flipside, Maple-Brown Abbott said it is less optimistic about other asset classes like Australian value equities, which could offer “tepid, if not disappointing” returns in 2024.
Dougal Maple-Brown, head of Australian value equities, observed that the best-case economic scenario seems largely priced into markets and much of the potential gains for domestic value equities may have already been realised.
“It is difficult to conclude anything other than most of the potential gains of 2024 were pulled forward into 2023, and thus, we believe the market returns in 2024 will, at best, prove tepid, if not disappointing,” Mr Maple-Brown said.
“If that is the case, then it is also likely that the stocks that have propelled markets to highs will disappoint, which should support the performance of contrarian, value-oriented managers.”
