Small Cap Top 10: You've got to know when to hold 'em, know when to fold 'em...

Macro Cycles

Global markets maintain the positive sentiment, driven by Chinese stimulus in response to the US Fed's emergency rate cut, despite rising Middle east war risks. US mega techs led global market performance has pushed global multiples back to post-pandemic highs. Locally, global funds shifted from pricey banks to struggling miners, keeping the market steady. After US Fed’s emergency rate cut, China’s stimulus was anticipated due to a slowing economy, rising geopolitical tensions and a strengthening currency. While most Chinese stimulus policies weren't new, equity market support to bailout fund managers and banks was unique. Markets continue to expect more from China, but historical trends suggest optimism may fade like prior pre-holiday stimulus moves. The US Fed’s actions may raise inflation in an environment where supply is likely to be restricted by global wars and US port strikes. US Fed’s emergency cut is likely to prompt other major central banks to cut rates to manage currency fluctuations and support exports.

Policy Outlook

The US Fed's emergency rate cut signals a weak economic cycle where debt and inflation are set to rise. Governments may be compelled to increase handouts during election cycles, further fueling inflation concerns. Despite local efforts to curb inflation and the US government releasing oil reserves to lower energy costs, core inflation remains above target and could rebound with rising demand for services. With low jobless benefits globally, employment is likely to stay stronger than expected as more unemployed workers turn to gig economy jobs amid a higher cost of living environment.

Data Analytics and AI takeaway

Investment trends continue to oscillate between growth and value weekly, with the local market consistently showing value outperforming growth. Rate cut optimism has brought leveraged positions back into favor, while the overall trend leans toward size, dividends, and profits. Increasing market risks are driving gold to new all-time highs as the preferred hedge, while the rate cut cycle has made defensive yields popular again.

Investment Strategy

Global markets maintained stretched valuations into a new quarter as the anticipated China stimulus, following the US Fed’s emergency rate cut, is seen as the beginning of a broader stimulus cycle. China's plan to support banks, fund managers, and the property sector aims to boost consumer spending and stabilize the economy ahead of a weeklong holiday. Emergency monetary actions from both the US and China are likely to increase inflation, benefiting inflation-sensitive sectors like Gold, Food, and Energy. The Uranium sector is surging on growing energy demand from tech, while Rare Earths rebound on supply concerns and defense exposures outperform in rising geopolitics. Middle East war expansion and rising services costs are expected to elevate inflation risks in a slowing global growth cycle. Risk management remains crucial as the US election approaches.

Model Portfolio

Small Caps Top 10 model portfolio currently benefiting from the key inflationary sector thematic. The stretched asset valuation, slowing global economy, badly timed US emergency rate cut, expected pre-holiday China stimulus suggest that most governments need distraction from economic reality. Global funds have been rotating out of expensive banks into miners under the China stimulus spin while both sectors are likely to experience cyclical decline. We continue to be skeptical about the market’s ability to sustain the overall expensive market multiple while some segments are expected to outperform. Hence the data driven targeted sector/stock selection strategy with risk management continues to outperform in volatile outlook.

The best performers over the last three months in the Small Cap Top 10 are: Austal (ASX: ASB), Elders (ASX: ELD), Regis Resources (ASX: RRL).

Note: DDA may or may not have made changes to the model holdings since last update. The data driven model portfolios will continue to evolve with the economic and market cycles.