An opportunity like no other for small caps
As the country pulls itself out of a global crisis we see both monetary and fiscal stimulus working overtime, presenting an opportunity like no other for small caps. Historically, the majority of fiscal stimulus has been provided to those businesses related to asset ownership. This is due to central bank stimulus flowing through financial institutions who prefer loans secured against assets.
Fiscal policy differs as it's deployed by governments who are not seeking to obtain a return on investment but aim to support areas that will benefit the population. Sectors seen as less credit-worthy in the past will now receive direct support like never before.
Small caps are also benefitting from the underperformance of the Big Banks. The increased regulatory risk brought on by the financial services royal commission and governance risk resulting from the Anti-money laundering breaches has caused divestment from this portion of the market. We think small caps have seen a lot of this cash flow as a result and led to their outperformance of large caps this year.
The sectors that we see benefitting most from this combination of monetary and fiscal stimulus are:
- First home buyers
- Aged care, and
- Renewable energy
In a recent interview, I sat down with Sinéad Rafferty, Investment Specialist at Fidante Partners to give my thoughts on the outlook for small caps and the impact on markets from increased fiscal spending.
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Sinclair Currie is a Principal and Co-Founder of NovaPort Capital with 24 years of investment experience. Prior to establishing NovaPort, Sinclair worked at Challenger Limited (Challenger) managing over $200 million in funds.