A weaker AUD can provide growth opportunities in the small cap sector

The last 12 months have been eventful. Amidst the uncertainty caused by Greece, China, the US Federal Reserve’s interest rate decision and ongoing global growth concerns, investors may be wondering – ‘Where are the opportunities for growth going to come from?’

The Australian small companies sector is full of ‘hidden gems’ ready to be discovered. For example, the weaker Australian dollar has had a positive impact on many companies. While a depreciating dollar might mean your overseas holidays and internet shopping are more expensive, it also makes Australian exports much more competitive internationally.

That doesn’t just mean exports of physical goods like coal and iron ore, but services such as tourism and education as well. The weaker dollar has attracted increasing numbers of holidaymakers and students to Australia, benefiting companies exposed to these industries.

The Colonial First State Small Companies, Core team look for companies with sustainable competitive advantages, good returns on capital, and management teams whose motivations are clearly aligned with shareholders.

It’s also very important for companies to generate strong free cash flow in order to fund their future growth. It’s these types of companies that are likely to generate value for shareholders over time.

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As well as looking at the opportunities, risks are front of mind for the team too, which is why ‘on-the-ground’ research is important part of the investment process. Meeting with senior management and visiting the company’s operations help the team to see the company’s potential and enables them to better understand the risks in a business.

The depreciating dollar is a case in point, as it has increased the cost base for companies that source materials from overseas. Many Australian manufacturers import raw materials from overseas and have other costs outside Australia. The currency depreciation has eroded their profit margins, which of course can be a concern to the team as investors.

For the Colonial First State Small Companies, Core team, successful investing in the small cap sector is as much about avoiding the losers as picking the winners. At the end of the day, it’s not much use having one if you don’t have the other.

For more information, please visit: www.colonialfirststate.com.au/specialist

Adviser use only. This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 23 March 2016. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Colonial First State is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Colonial First State also issues other investment products made available under FirstChoice Investments and FirstChoice Wholesale Investments, other than FirstRate Saver, FirstRate Term Deposits and FirstRate Investment Deposits which are products of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is a wholly owned subsidiary of the Bank. The Bank and its subsidiaries do not guarantee the performance of FirstChoice products or the repayment of capital from any investments. This document provides information for the adviser only and is not to be handed on to any investor. It does not take into account any person’s individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) before making any recommendations to a client. Clients should read the PDS before making an investment decision and consider talking to a financial adviser. PDSs can be obtained from colonialfirststate.com.au or by calling us on 13 18 36.