Inflation shifts focus onto SMID cap companies

Global equities boutique manager, Bell Asset Management (BAM), has signalled their belief that expectations of higher inflation will favour smaller, quality companies that can raise prices without affecting demand.

Speaking at a virtual event recently, Ned Bell, BAM’s Chief Investment Officer, said the stock market was moving from a focus on big growth stocks like technology companies to smaller companies in sectors like health care and consumer goods.

“There is definitely a change happening. Clearly, we’ve seen a lot of valuation risk materialise at the top end of the market, however we’re seeing good valuations in the global small to mid-cap (SMID) area,” Bell said.

He also said global SMID cap companies have a price/earnings ratio of 16.8, which is a 40% discount when compared to large cap growth companies.

“The earnings recovery still has a long way to play out in the SMID arena, with SMID EPS growth in 2022 estimated to be 21% compared to 12% for the MSCI World index.

“Global small and mid-cap equities could arguably appreciate by around 33% over the next 12 months.”

Bell said this financial environment will support high quality companies with pricing power to succeed, as inflation spikes and interest rate rises could negatively impact companies without pricing power.

“From our perspective, the magnitude of inflation will come off but it’s not going to disappear.

“We believe ‘quality’ will shine in an environment where inflation is rising, interest rates tick higher, stimulus dissipates and global economic growth decelerates,” he said.

Bell also highlighted the buying opportunities that arose from volatility in markets in early 2022 causing companies to be oversold. He said BAM subsequently re-established positions in Japanese tech and medical products company Hoya, global medical technology company Masimo and drinks chain Starbucks.

“We’ve sold all of these companies sometime in the last two or three years for valuation reasons,” he said. The share prices of the firms had fallen by 36 per cent on average in the recent market sell-off.