Aussie small caps, global emerging markets back in vogue for 2024: Maple-Brown

While ‘uncertainty’ appears to be the prevailing catchcry of 2024 market forecasters, boutique fund manager Maple-Brown Abbott is confident of a substantial change of fortunes for Australia’s small companies this year, with the long-challenged small caps market predicated to experience one of “the most favourable environments” since the global financial crisis.

Phillip Hudak, Maple-Brown Abbott’s co-portfolio manager for Australian small companies believes the small caps market (comprising public companies with a market cap of between $50 million and $500 million) will hit “an inflection point” this year, spurred by a “more favourable macro-economic backdrop and expected earnings trajectory”.

“With a lot of negative sentiment priced in to 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,” Hudak said.

The local S&P/All Ords small caps index is down by 2.2% in the three years to date, significantly outperformed by the ASX200 (+3.87%) and ASX100 (+4.46%) indices.

Matt Griffin, Maple-Brown Abbott’s co-portfolio manager for Australian small companies, agreed with Hudak’s positive outlook on small caps, noting some key 2024 themes in the local market, including an “under-estimation of wage inflation, a ramp-up in corporate activity, strengthening fundamentals in the uranium sector and [the] potential re-emergence of the gold sector”.

Also likely to benefit from expected the peak in interest rates and higher rates of economic growth, as well as increasingly “attractive valuations”, global emerging market funds are forecast to have a strong 2024, according to Maple-Brown Abbott.

“Emerging economies have generally been ahead of the curve in fighting inflation, helped by moving early with rate rises and maintaining fiscal discipline,” said John Moorhead, head of global emerging markets.

“That leaves many emerging market governments and central banks well placed to stimulate for growth.”

He added: “For the first time in close to two years, the broad emerging markets index is seeing a sustained lift in the outlook for earnings. At the bottom-up level, we are uncovering exciting opportunities in companies that are already reporting strong fundamentals,” Moorhead said.

The investment firm has also expressed rare optimism on China, believing there to be “a number of attractive opportunities for investors.”

Will Main, head of Asia, believes confidence could return to China’s equities market in 2024, “where 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,” Main said.

“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.”

Highs & lows in global infrastructure

Global listed infrastructure is, however, unlikely to see a stable 2024, according to Maple-Brown Abbott analysts, with outsized unpredictability favouring defensive essential service assets.

“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,” said Maple-Brown Abbott co-founder and portfolio manager Justin Lannen.

“Inflation, while declining… is in our view mostly under control, is looking more unpredictable than in the pre-Covid years and we maintain the belief that the embedded inflation pass-throughs in infrastructure will remain a valuable feature of the asset class,” Lannen said.

Steven Kempler, co-founder and portfolio manager, Maple-Brown Abbott global listed infrastructure, said investor focus should remain on infrastructure assets “that generate inflation-linked cashflows through both good and bad economic times”.

According to Maple-Brown Abbott co-founder and managing director, Andrew Maple-Brown prime opportunities are to be found in listed infrastructure companies that play a role in the energy transition, electrification of society, water, transport mobility and digitalisation.

Unpredictability colours 2024 forecasts

Overall, an “unpredictable political and macroeconomic landscape” has set the scene for a potentially rocky 2024.

While best-case scenarios, including a rare ‘soft landing’ for global economies following record policy rate rises worldwide, have already been priced into markets, the reverse does not appear to be the case.

“The overwhelming risk is that economic conditions turn out worse than expected. The best-case scenario seems largely priced into markets.”

Maple-Brown Abbott predicts that overall market returns in 2024 “will at best prove tepid, if not disappointing” with the “potential gains of 2024 [already] pulled forward into 2023”.

“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.”