Four factors triggering small caps outperformance
Ophir Asset Management has identified four reasons that small caps outperformed in August.
In the firm’s latest investor update, the boutique fund manager said August had seen better returns than previous years, returning 2.2% during the month. The ASX Small Ordinaires index performed even better with returns of 7.25% during August.
According to FE Analytics, within the Australian Core Strategies universe, the Ophir Opportunities fund had returned 23% over one year to 31 August versus returns by the Australian small and mid-cap equity sector of 7.8%.
The firm, which specialises in small cap equities and received a 5 Crown rating in the latest FE fundinfo Crown rebalance, said there had been four factors which had helped the market during the month:
Strongly-performing IT sector
The IT sector was helped by stocks such as Afterpay, Nearmap and NextDC to outperform its US counterparts. The tech sector was the best-performing sector during the month.
“If you thought only the US was throwing a tech part, our Aussie IT market whilst dwarfed in size by the US, showed it knows how to mix with the big boys, providing twice the return of the next best sector in the local market during the month,” Ophir said.
Federal Reserve stimulus
In a new policy stance, Fed governor Jerome Powell said he would let inflation run “moderately” above 2% “for some time” rather than preventing it surpassing 2%. This meant it would continue with its policy of low interest rates rather than raising them regardless of a recovery in inflation.
“This pivot in strategy will now seek to make up for the previous inflation undershoots such as we have seen over the last decade. That’s positive for equities. It means the Fed punchbowl is here to stay, likely for years, and that more monetary stimulus may in fact be on its way at its September meeting,” it said.
Re-opening of economies
The easing of lockdown restrictions around the world prompted good returns for companies in the travel and hospitality sector such as Webjet, Corporate Travel Management and Flight Centre. Global stocks which benefited included Delta Air, Hilton and United Airlines.
“Generally, in places where restrictions have been tightened, they have been much more targeted and growth friendly. That’s helping the economic recovery to hold- at least to date,” it said.
Reporting season better than feared
The full-year earnings guidance reported by companies in the month had been “better than feared” the firm said, with around 60% of companies logging positive excess returns. Corporate earnings for the 2021 financial year were downgraded by 1.4% during reporting seasons, indicating the effects of the pandemic would continue to filter through into next year.
“Investors were fretting about uncertainty and reduced company guidance. But in a sure sign investors were too pessimistic, about 60% of companies logged positive excess returns in three days after they announced their results. This saw a positive excess return of 1.8% highlighting results were better than feared,” Ophir said.
AUTHOR
Laura Dew
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