The small and mid-cap investments to watch in today’s uncertain markets

For a hot second there, we all thought 2025 was going to be fairly cruisy. The continuation of a strong bull-run, the end to recession fears, a couple of rate cuts. The biggest concern was perhaps the high premiums on stocks like the Magnificent Seven.

To quote Game of Thrones, “oh sweet summer child…”

As Ben Griffiths, Executive Chairman of Eley Griffiths, puts it, “Coming into the middle of February, growth stocks were on a strong tear. Tech names were rallying powerfully. 

But, from about the middle of February, investors’ angst around geopolitical positioning, comments from President Trump, and concerns around a slowing economy have seen an exodus from tech and growth names in favour of value names, including consumer staples.”

Griffiths observes that Goldman Sachs see the probability of a US recession at around 20% - not a favoured outcome, despite growing recessionary fears blazoned across US financial mastheads on a daily basis.

As headlines change by the minute, there’s a lot to process for investors – but of course, uncertainty can also mean opportunity and Griffiths is seeing plenty to like across the Australian small and mid-cap space.

So, are we seeing the start of a big rotation and what does this all mean for investors?

I sat down with Griffiths to discuss how he is approaching the market and the opportunities he likes.

The shift to value

In the past few weeks, we’ve watched the US and Australian markets lose much of their gains and investors start to move towards value stocks.

Griffiths reminds investors that this type of activity is not unusual in market cycles.

“We saw this, for example, back in 2022, when growth stocks went into their crescendo, then started selling off and value stocks rallied. The economic underpinnings were different than they are today. We had a different interest rate regime. We had different inflationary settings as well. But, that process of de-rating probably went on for about 12 months, before growth returned to normal,” he says.

He cautions that what we’ve seen in the past few weeks could simply be a false start but knowing when to reorient portfolios remains “the great black art of funds management”.

“As is always the case when investing in markets, you need to let some water flow under the bridge before deciding whether there’s a new style bias in effect,” he says, suggesting investors monitor US equity fund flow information and look for a continuation or breakdown in stock and/or sectoral performance to reinforce conviction of the need for rotation.

“If we start seeing a broadening sell-off in growth names and the fund flow data backs that up, you might begin thinking there’s something more serious at foot here.”

He thinks we’re seeing a clear display of PE multiple de-rating, and concedes that consensus EPS growth for 2025 in the US feels a little stretched, especially among US small companies and anticipates a realignment in expectations to occur.

Griffiths saw the same style shift in the US start to manifest in Australia during the latest reporting season.

“Stocks that boasted strong value factors, like high free cash flow yield, dividend yield and earnings yields, performed well in the second half of the reporting season. Whereas stocks that were more 'growthy' in nature with fundamental growth and earnings per share growth attributes actually lost investor support during the latter stages of the reporting season. It was interesting to note that momentum and liquidity factors weren't strong performers during this time,” Griffiths said.

Much of the downgrading Griffiths saw was in tech, healthcare and several financial names.

He notes turnaround stories like Eagers (ASX: APE), Corporate Travel (ASX: CTD) and Megaport (ASX: MP1) were well rewarded by the market initially but struggled to hold on to these post-result gains. Several market darlings like Pro Medicus (ASX: PME), Fisher and Paykel (ASX: FPH), JB Hi-fi (ASX: JBH) and Car Group (ASX: CAR) were perhaps too well-owned to extend pre-result rallies. Griffths still views these businesses as "well managed and "terrific franchises" and investors shouldn't lose too much sleep at the market's short term reaction to these results. 

The opportunity from de-rating

Griffths is seeing plenty of opportunity to add to high conviction holdings.

“Portfolio staples have actually de-rated. Stocks we likes a few months ago have just gotten 4-5 PE points cheaper, and would include Pinnacle (ASX: PNI), Breville Group (ASX: BRG), ARB Corporation (ASX: ARB) to nominate a few,” he says.

He continues to like the gold sector, but hasn’t seen much correction in the gold space yet. Gold names are a preferred holding for Griffths. Interestingly enough, he references gold producer Capricorn Metals (ASX: CMM) as boasting not only a sound operating model but having particularly strong governance disciplines at board level - critical attributes for the long term success of any business.

Griffiths also sees the consumer discretionary sector as looking interesting in the current environment.

“It’s highly probable that in the next six months, we could see some of the most conducive consumer conditions that we’ve seen in the past three or four years. We’re already experiencing growth in real disposable incomes again. We've just had an easing in interest rates and the prospect of another cut this year and in a few months, the Federal Election will be behind us. That's a powerful and reassuring triumvirate for consumer activity," Griffiths says.

Retailing names set to benefit will require the requisite management teams with strong execution prowess, focused on growing their businesses through the lens of superior shareholder returns.

“Nick Scali (ASX: NCK), Lovisa (ASX: LOV), Temple and Webster (ASX: TPW), Breville Group (ASX: BRG) spring to mind as names within the consumer discretionary sector where conviction remains high,” Griffiths says.

What to focus on in coming months

With all the market uncertainty, Griffiths believes there are a few critical things for investors to consider.

One is whether we’re watching a style bias rotation playing out or simply a short-lived de-rating process.

“It could easily be a mean reversion rally in value and correction in growth before the growth trend resumes, or it could be the beginning of a broader style shift,” Griffiths says, suggesting investors will need to remain vigilant.

He believes investors have been caught off-guard by the speed of execution of the Trump agenda and raised geopolitical temperature. Both have had an unsettling effect on investor sentiment in a short space of time and largely catalysed the correction underway at present.

The second thing Griffiths highlights is divining what the Trump regime and its platform of change mean for the most heavily invested-in stock market globally. This will have significant effects on capital flow.

“Investors need to get their minds around the new status quo in Washington and the ramifications that has for the medium-to-long term performance of the US stock market,” Griffiths says.

Trump obsessed over the S&P 500 index performance in his first term, but "indications from the first few months of this current presidency would suggest there's less regard for S&P 500 outcomes. He's focused on structural change he sees needing to be made."

It's an interesting time to be an equity investor particularly as the angst around the correcting US stock market lines up with a possible, early stage revival in the fortunes of the Chinese share market from deeply depressed levels.

“It remains to be seen whether this is a pause in the greater bull story, or whether there’s some damage being done to US exceptionalism,” he says.

None of this amounts to a halt to investing in high-conviction sectors and stocks - Griffiths is certainly taking advantage of the present de-rating to buy into well priced opportunities - but, more a reminder to investors to take in the bigger picture and look to available market information before making significant portfolio changes.