- For the month the Small Ordinaries rose strongly (+3.9%) outperforming the ASX 100 Leaders which rose by +2.6%. The Small Resources index (+4.4%) recovered some of Novemberís fall to be ahead of the Small Industrials (+3.8%). The month was characterised by a wide spread of returns with some sectors such as gold and exporters of food/healthcare products for the Chinese market doing particularly well. Energy and domestically focussed healthcare stocks did poorly. The well signalled increase of 25bps in the US Fed Funds rate to a range of 25-50bps had little impact on markets.
- The Small Cap sector returned +10.2% in CY15 significantly ahead of the ASX100 Leaders return of +2.1%. Within the ASX100 Leaders the large weighting to the banks, which are reporting slow growth and had to recapitalise, resource giants BHP and RIO, which are being pressured by weak commodity prices and Telstra which is also struggling to grow, have all weighed upon returns. In contrast, Small Caps offer greater flexibility to allocate away from lower growth sectors and to seek stronger valuations. This has led to greater investor interest in Small Caps.
- The Governmentís Mid Year Economic and Fiscal Outlook (MYEFO) showed a $2.8bn deterioration in the FY15/16 estimated budget deficit. While expenditure is unchanged, the deterioration in commodity prices and corporate profitability have impacted revenue. In order to plug the gap the Government announced several initial measures including tighter discipline on welfare payments and cuts to incentive payments for bulkbilling which will impact pathology and diagnostic imaging providers. The taxation review and medicare review are due next year and are also likely to reflect the tightened fiscal position. Notwithstanding the forthcoming election, budgetary constraints are likely to be a headwind in some sectors, particularly healthcare.
- Positions in Auckland Airport, Bega Cheese, and Macquarie Atlas Roads were reduced following strong price moves and deteriorating valuations. Weaker share prices and more attractive valuations led to increased investment in Cardno, Billabong, Shine Corporation and Capitol Health.
- The portfolio underperformed the benchmark in December. In the market, share price momentum was positively rewarded and not holding several ìhot stocksî hurt relative performance. Small negative attributions arose from consulting engineer Cardno, litigation funder IMF and surfwear retailer Billabong. Positive attribution came from salary packager Smart Group, dairy products producer Bega and billing software provider Hansen. Outlook
- The trajectory of future rate rises by the US Fed is likely to be very shallow reflecting the fragile recovery. Of more concern to the world economy are economic developments in China where growth is slowing and there are imbalances. Domestic growth in 2017 looks likely to be positive but modest.
- Market valuations are supported by current low interest rates and are benefitting from a low $A which has increased foreign takeovers. Some sectors, notably technology, appear stretched.
- We expect stocks with sound valuations, solid balance sheets and recurrent earnings to outperform.