Last year JSE equity gains were underpinned by the powerhouse performance of resources, which rocketed 71,5%. With market-watchers now trying to identify the “outperformer” of 2006, Stanlib says small caps are high on the list of potential big winners.
In 2004 the small cap index returned 55%. “In 2004 some retail counters achieved exceptional gains. That year the rand strengthened considerably, which helped smaller companies focused on the domestic market,” says Anthony Sher, who says there are similar patterns emerging for 2006, which could support the sector. “We have recently seen renewed rand vigour while local retailers continue to benefit from consumer confidence and low interest rates.”
Sher says new factors include stronger balance sheets and a belief by some that renewed corporate activity is imminent. “Many smaller operations are strongly cash generative. Domestic growth rates of 4% to 5% have contributed to robust health for many small and mid-cap companies. As the managements of these companies prove their ability to add value and build profit, so they attract the attention of industry leaders, setting the scene for M&A activity. The strong economy and cash-flows may also contribute to new listings on the Alt-x and perhaps the graduation by some successful Alt-x players to the JSE’s main board.”
Corporate activity would tend to focus investor interest on small and mid-cap stocks at a time when many investors are looking for new directions. After nearly three years of broad-based equity growth, some fund managers are adopting a selective stock-picking strategy as a way of protecting gains without retreating from equities. This tactic could benefit smaller financial service players and technology companies which have bounced back from the IT slump of 1998/99.
“Some financial service players have benefited greatly from the equity boom of the past 32 months. They are well managed and may offer value opportunities. The same can be said for some technology counters. Companies that survived the late 1990s shake-out did so because they are well run and have a solid client-base. These companies have had seven years to grow and warrant a new look.”
Investors taking a thematic approach have also focused on the construction sector because infrastructure development is a strategic theme for policymakers looking to create jobs and boost fixed investment. Again, some small- and mid-cap construction counters are well placed to benefit.
“We are seeing increasing demand for authoritative data on small caps with big potential. This is perhaps the strongest indicator of all that this sector is increasingly attractive for those looking for extra equity upside in the coming months.”