October 29, 2025 • 24 mins
We welcome back Michelle Lopez, Head of Australasian Equities and Portfolio Manager at Pie Funds—our go-to expert on small caps and big potential. Michelle shares how she sees caution among her peers despite market highs, and why she sees this market rally as “narrow”.
Michelle covers the state of travel, retail, property, and the rise of DIY—and the sectors set to benefit as we move deeper into a national rate cutting cycle. How are Michelle’s team watching for clues to indicate that the data center boom is slowing? Hear about the three big factors propelling performance for Australian small caps, a massive year for gold, and possible risks in rare earths.
Plus, getting indirect exposure to AI through Aussie infrastructure and software companies.
For more or to watch on YouTube—check out http://linktr.ee/sharedlunch
Shared Lunch is brought to you by Sharesies Australia Limited (ABN 94 648 811 830; AFSL 529893) in Australia and Sharesies Limited (NZ) in New Zealand. It is not financial advice. Information provided is general only and current at the time it’s provided, and does not take into account your objectives, financial situation and needs. We do not provide recommendations and you should always read the disclosure documents available from the product issuer before making a financial decision. Our disclosure documents and terms and conditions—including a Target Market Determination and IDPS Guide for Sharesies Australian customers—can be found on our relevant Australian or NZ website.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
No one's all in. No one's like it's going to
keep going or actually there's quite a level of conservatism.
There is risk obviously with all this tariff and stimulus
coming through, that we're going to go through another period
of heightened inflation. I think that's a real risk depending
on what part of the Australian market you look at.
We're up sort of twenty to forty percent, so everyone
(00:22):
that's the god can't keep going. And it's done so well, well,
it's done so well since the absolute lows of people,
but it's still quite really cycle.
Speaker 2 (00:30):
Hi, welcome to Shared Lunch, brought to you by Chasis.
I'm Jackie Newman, head of Capital Markets at Chaz's. Today
we're welcoming back Michelle Lopez, head of Australasian Equities and
portfolio manager at PIE Funds.
Speaker 3 (00:47):
Investing involves the risk you might lose the money you
start with. We recommend talking to a licensed financial advisor.
We also recommend reading product disclosure documents before deciding to invest.
Everything you're about to see and here as current at
the time of recording.
Speaker 2 (01:01):
Before we get started, I want to acknowledge the gaddigle
people of the EURA nation, the traditional custodians of the land, water,
and sky from where we're filming today, and pay respects
to elders past and present. Hi Michelle, great to have
you back with us. Thank you for joining. Last time
we had you on the Liberation Day, tariffs had just
(01:24):
been announced and markets were quite volatile. Fair to say
that there is still some noise around tariffs and uncertainty persist,
but by and large it feels like volatility has somewhat abated,
and indeed we've seen markets rally in the last few months.
Looking at it through your expert lens, how would you
(01:46):
characterize global equity market conditions at the moment?
Speaker 1 (01:51):
Buoyant still, but it's quite incredible looking back on the
last six months. The market's kind of been linear since
and on an upwood trajectory, and a lot of the
indices you know, there's and P five hundred being the
main one globally US based. It's been quite a narrow
(02:12):
still performance period. So by narrow, I mean a select
few type of companies very much those leverage to AI,
the big tech companies in Magnificent seven that everyone keeps
talking about, they're still driving the rally. When we sort
of think about conditions. What's really sort of propelled that
is obviously a lot of the political side of things.
(02:35):
We've got a bit more line of sight around tariffs.
There is policy changes happening on a daily basis, though,
so there are certain sectors that are being affected more
than others. Healthcare is the sector in the US and
globally in fact, because you know, it is a global
sector that is still sort of finding its way through
new tariff announcements. So I certainly don't think that it's
(02:59):
all a clear and green light ahead. But you know,
as we've seen in indocry performances and specific companies, it
has been a really buoyant time to be in the
market over the last six months. The other thing i'd say, though,
it's not it's not a uniform kind of positive sentiment
(03:20):
out there. In fact, when I speak to a lot
of my peers and a lot of my colleagues, no
one's all in. No one's like this is you know
it's going to keep going? Or actually there's quite a
level of conservatism that I'm that I'm seeing and I'm hearing,
and I have it, and I share that level of
conservativesm myself and there's there's a few factors driving that.
(03:43):
We're also starting to see, you know, revisions to the
employment market, so that unemployment number in the US specifically
being revised upwards. More recently, we've had you know, unemployment
TI cup in Australia as well to four and a
half percent. A lot of capital has come into our market,
and you know, stepping outside of the equity market, you've
(04:06):
got private credit which has seen a huge influx. There's crypto,
there's and everything feels like it's going up at the moment,
but the sentiment I think is quite bifurcated. You've got
some concerns and then you've got some people that are
amor thematic driven AI. Anything that has AI connected to
(04:26):
it in some way seems to be doing really well.
Speaker 2 (04:29):
So if you take a closer look at the Australian market,
how would you say that it looks relative to other
offshore markets at the moment? And I guess what I'm
saying is, would you say that now is a good
time to be more or less invested in local stocks?
Speaker 1 (04:45):
Our market's quite different to the global market, and I'm
saying global a lot of it is very much still
US driven, in the sense that AI and tech is
a very big part of that market. We don't have
that in Australia or New Zealand. In fact, when you
(05:05):
look at the large cap part of the market, it's
you know, the big four banks, We've got some supermarkets,
We've had some healthcare names in there as well, West Farmers,
so very different drivers. That part of the market has
done exceptionally well over the last four years. And in fact,
(05:26):
what we've seen more recently over the last three months
call it six months, as large caps and those big
blue chip companies in Australia probably not do so well.
At the other end, which is small caps, it's a
much much broader composition within that part of the market.
And what's driven small caps over the last twelve months,
(05:48):
and I'll probably drill it down to three things. It's commodities,
specifically gold, It's anything kind of defense related, and technology
as well. And we're starting to see again the underperformance
that we've had in small caps over the last four
years start to unwind a bit and catch up. You ask,
(06:09):
is it a good time? It is because it's broadening out.
So I said that the global rally has been very
much driven by these larger companies, tech AI, all of that.
We're starting to see that broadened out in Australia. And
what's driving that is economic conditions, interest rates. So as
(06:29):
New Zealand, as most of the developed world actually is
cutting rates, we're in that cycle too. And what that
effectively means is you've got a lot more sort of
macro support and economic support and stimulus coming through. So
I think it is an interesting time depending on what
part of the Australian market you look at. We're up
sort of twenty to forty percent from the lows in April,
(06:53):
but on a yearly basis, on a twelve month basis,
you know, the large cap is up maybe eight percent
and the small cap is maybe up eighteen percent. So
it's not euphoric in any way. So everyone that's saying, oh,
I can't keep going and it's done so well, well,
it's done so well since the absolute lows of April,
but it's still quite early cycle.
Speaker 2 (07:14):
So do you feel as though there is a likelihood
that small caps will continue this outperformance? What's your sense
on how that will play out in the next twelve
months or so, just looking at the economic picture and
other factors. Yeah, I do.
Speaker 1 (07:28):
I do think it will continue. But let me tell
you why, because I think sort of the reasoning is
probably more important what drives small caps and if I
sort of outlined those kind of macro settings, So you've
got interest rates coming down, why is that a positive
for small caps? Well, three reasons. Firstly, cost of debt
(07:51):
is cheaper. A lot of these small caps rely on
debt funding to grow, so either capital expenditures or m
and A or whatever the case may be for capital allocation,
it's gotten cheaper. And typically the term on the debt
is shorter because bank's not willing to lend out five
ten years for more sort of riskier assets or companies,
(08:14):
so they're refinancing at much lower rates and that directly
falls through to the bottom line from an earnings perspective.
The second thing is the consumer. So the consumer underpins
small caps in a big way. As you would know,
if your interest rate on your mortgage is going down,
then you've got a lot more discretionary spend, so it
kind of goes across the board. And then thirdly, valuations,
(08:36):
So a way to value a company is discounting its
earnings back to the present, So future earnings back to
the present. The discount rate that you use is tied
to cash rates, so effectively there's a direct correlation lower
indirect correlation lower rates, higher valuations. So there are three
(08:57):
things and why that affects small caps more and positively
impact small caps more than large caps, So we have
a rate cutting cycle. The other thing i'd say, and
I came back to small caps being a much broader
reflection of our economy. Commodities is a big part of
that index, so it's probably worth touching on that separately.
(09:21):
But you've got everything from consumer stocks, discretionary, you've got contractors,
you have healthcare, you have tech, and it's a real
property and it's just a much more balanced view. So
when we're in constructive economic backdrop like we are now,
you've got fiscal stimulus, you've got monetary policy easing, and yes,
(09:44):
unemployment I mentioned sticking up a little bit, but it's
still very supportive and that all plays into sort of
a positive outlook for small caps, i'd say more so
than large So yeah, I think over the next twelve
months longer out it is very it is sickly coll
part of the market, so it's not forever, but yeah,
I think for the next twelve months to frame the
(10:06):
timing there, there's still scope to continue the outperformance.
Speaker 2 (10:09):
I guess if we could zoom in on some of
those sectors that you mentioned around and the themes around
lower interest rates and a more positive consumer. Firstly around
our interest rates, are there any particular sort of sub
sectors or stocks even that you're focused on that you
think are sort of leveraged to this lower rate environment
(10:31):
that we're in and with rates expected to go even lower.
Speaker 1 (10:35):
As a house Pythons really does look at companies on
a case by case basis, so we are very much fundamental,
bottom up investors, and it's all about the company. Having
said that, though, we wouldn't be doing our job properly
if we didn't recognize the industry that they're participating in,
and it's a very big part of the assessment that
(10:57):
we undertake of the company. So there are absolutely industries
or sectors that benefit more. A very simple one to
understand is property. So we've had a lot of our
rates trading at very steep discounts to their NTA, their
net tangible assets. So the backing the property of backing,
(11:20):
so anywhere between you know, twenty all the way down
to fifty percent discounts. So what a rate cutting cycle
implies is, obviously you're able to take our debt to
actually drive growth within sort of the property sector. And obviously,
as I mentioned before, the debt that you do becomes cheaper,
(11:40):
so you have earning secretion come through. So that's a
very very easy one to understand. But then there's second
order effects of it. So you've got the consumer consumer discretionary.
That's a part of the market where we've got more
money in our pockets, we can go out, we can
spend more, and how that filters through is across multiple
of sector. But you know, retailers, at the August reporting
(12:03):
season that just passed, retailers had a really good period
and we've started to see retailers post positive same store
sales growth all like for like growth in their revenue
in their sales. So that's a direct indication. And in fact,
we were starting to see our retailers that had operations
(12:24):
in New Zealand post really positive numbers. So anywhere between
sort of fifteen to thirty percent growth. I don't want
to get overly excited because these aren't kind of the
incumbents in the New Zealand market, it's you know, UJB,
high fives, ARB Nick scale. They are sort of cracking
that market and probably the growth, but they were going
(12:46):
backwards not that long ago. So we did start to
see grain shoots in our retailers and I think that
they are very rate sensitive.
Speaker 2 (12:53):
Are there any other consumer sub sectors, whether it be
trouble or you know, retail, specialty retail or anything like that,
any sectors sub sectors that are piquing your interest.
Speaker 1 (13:05):
Travel's tricky because travel's global and we've had a lot
of disruption across kind of global channels. And when I
look at the travel sector for US, there's the leisure
and then you've got your corporate travel. And the corporate side,
with all the geopolitical uncertainty that we've had, has really
(13:29):
come off. Leisure not so much, but it's still not
as exuberant as it has been probably over the last
twelve twenty four months, right, So I think that's a
trickier part, and there's lots of moving parts to that.
So I think travel looks interesting from evaluation perspective. A
(13:51):
number of our listed travel names are starting to screen
quite attractively, and I think it's a part of the market.
We're doing work on retail. Even within retail, you've got
different categories. So electronics, we're going through a big replacement cycle.
COVID four years ago, probably a lot of people bought
(14:11):
a laptop to work from home, whatever it is, and
that replacement cycle is kicking in Windows ten I think
are no longer rolling out or servicing that application, so
again another another reason to go out and buy. Then
we've got things that are leveraged to property. Property has
been interesting in Australia. I know it's been very tricky
(14:33):
and challenged. In New Zealand, we actually held up really
well up until about twelve months ago and then it's
just kind of flatlined. It's probably down a little bit,
but not kind of the twenty percent moves thirty percent
that we've seen in New Zealand. But we're starting to
see a bit of recovery in that space too, so
that filters down to your home, wears furniture. So yeah,
(14:54):
they're the parts that I'd say, I think at this
point in the cycle should continue to do well.
Speaker 2 (14:59):
And if we think about resources, you know, the resources
sector makes up a large component of the Small Worlds index,
and we've seen gold rally significantly this year if we
look at that sub sector. Are there any opportunities that
you're looking at in terms of gold stocks or commodities
more generally, where are you sort of focused on? At
(15:20):
the moment?
Speaker 1 (15:21):
Gold has been exceptional And you know, the interesting thing
about gold is it's typically thought of as a as
a safe haven, and the constructive backdrop for gold is
weaker dollar, lower interest rates, and uncertainty geo political uncertainty,
and that's all sort of played out, but it's gone
(15:43):
well above and beyond I think what the fundamental constructive
backdrop is, which may indicate a couple of things. People
are genuinely worried, and that safe haven status continues inflation,
so inflation risk gold is seen as a hedge for inflation.
(16:03):
So even though it's sort of down into ranges where
central banks wanted to get them down to, there is
risk obviously with all this tariff and stimulus coming through
that we're going to go through another period of heightened inflation.
I think that's a real risk. So there's people buying
on sort of fundamentals, but then you've started to see
(16:26):
a bit of euphoric activity. And it's interesting Martin Place
just here in town. I'm sure you've seen sort of
the pictures. There's light lines out the door. Is it
a bubble? I don't think so. Can it correct twenty
thirty percent? I think so. So. Bringing it back to
the markets, the goal price itself, I think I'll have
to I'll have to check this. I didn't check it
before I came in, but I think the gold price
(16:47):
is up something like fifty percent. Gold equities are up
one hundred percent over the last year. And what we've
seen within that, and that's typical. There's lev there's operating leverage,
there's financial leverage, and in fact, the ones that have
done best are your poorer quality ones that you know,
(17:08):
high high cash cost to operate, which means that the
leverage that they get from a higher goal price is
more than sort of your good quality operators. But you've
done well owning anything gold related over this period. Other commodities.
I think I spoke about rare earths six months ago.
That's had an exceptional run that's been quite politically driven
(17:33):
as well. That the price itself hasn't moved too much.
So that's a situation that we're cautious on because again
it's a critical metal. It's strategically important for a number
of these industries that are in big sort of growth trajectory.
But when the fundamental commodity price doesn't move, it can
(17:56):
easily sort of whip back down. So we're quite careful
and mindful of that. Lithium is still quite challenged. We
had sort of a big as a little sort of
run up fifty percent, but that's kind of platted out
and that you have to bring it back to supply
and demand dynamics in a lot of those markets. But yes,
(18:18):
you can't avoid it, and unfortunately, being underweight that part
of the market for us, we've done, it's proudly done
quite well to be able to sort of hold the
performance and deliver exceptional performance without owning lots of those
companies that are run a lot.
Speaker 2 (18:36):
I want to talk about AI. It's very topical you
know in the media at the moment. Would you say
that there are ways to play that thematic more indirectly
across our markets.
Speaker 1 (18:49):
There's certainly companies in the AI space, it's just not
the concentrated nature in the large caps that we see
offshore the very obvious one is data centers, so there
is certainly small cap all the way through to large
cap in Goodman Group, who have now become one of
(19:10):
the largest DC operators or developers. Sorry, so you do.
You've got you know, even in New Zealand in Fertilla
and a fifty percent stake in thereabouts stake in CDC.
CDC are an exceptional operator of data centers, and you've
got next DC as a mid cap in Australia, then
(19:31):
you've got Macroi Telecom sort of small cap, so that's
kind of a very direct way of playing it. There
is a massive amount of capital going into data centers
at the moment, and even just yesterday, CDC announced another
forty megawatt contract. The week before they announced one hundred
or the week for that one hundred megawatt contract, so
(19:52):
there is absolutely no shortage of demand from that, and
it seems that there's no shortage of capital that wants
to be invested in this space as well. So at
the moment there is clearly more demand than there is
supply by far, but at some point that will sort
of even out. I'm not expecting that at least for
(20:14):
the next three years, but at some point that will happen.
And the one thing I would note as a signal
to maybe pull back a little bit is when you
start to hear your big hyperscalers, your Amazon, your Google
cutting back there on their capex on AI. That's quite
a negative signal coming back to kind of opportunities. So
you've got data centers, then you've got a lot of
(20:36):
these companies that are internally generating products that are AI
enabled or to help their customers and clients be more efficient.
Here it's zero is a typical. They've got Agentic AI
module for their accountants using the software. You've got Wise
(20:56):
Tech that are coming out, which is logistics company. And
then more in the small and microcraft you've got Life
through sixty that are using sort of AI as well
with their application of tracking their tracking software. So it
goes the whole way through. So you can absolutely get
(21:18):
access to it. It's just more not those hyperscalers that
we have here that we can invest in. But there's
certainly ways and I would be shocked if fifty percent
of the company is that we are invested in don't
have some form of AI now embedded into their workflows.
Speaker 2 (21:37):
A good barometer for institutional investor confidence in the outlook
for markets are the cash balances that they hold. Last
time we spoke to you, you mentioned that across some
of the PI funds you were at or close to
mandate limits in terms of those cash balances, just given
some caution around markets. How would you say that has
(22:02):
changed in the last six months? Would you say that
you've got a lot of dry powder or cash on
the sidelines still? How fully invested are you?
Speaker 1 (22:13):
Yeah, we're very fortunate that our mandate allows us to
move as much into cash as we would like to,
depending on how we see the environment, what we have.
There are internal ranges that we like to operate in,
but those ranges change. So if sort of sort of
post COVID, that range went up to fifty percent, so
(22:34):
we could own up to fifty percent. Back in April,
we increase the range from I believe it was five
to fifteen percent, and we're sort of sitting at that
higher end. That range still holds today, but we're probably
more towards the mid to bottom end. We were very
fortunate that we're able to allocate and take up some
(22:54):
opportunities in the market. Now. Typically speaking, we are taking
a bit of profit in those names that are up
thirty forty percent, but we're seeing lots of opportunities. We're
genuinely seeing lots of opportunities coming out of reporting season
in August. We didn't touch on the contractors, but there's
anything real leverage to infrastructure. Infrastructure isn't just kind of
(23:18):
building roads and tunnels and that. It's it's electricity grid
and you know this whole electrification and talking about data
centers for example, the need of energy for those centers
to be built. There's been a massive investment in transmission
that's required. So that's what I mean sort of by infrastructure.
(23:38):
The contractors, whether it's you know, gold mining, whether it's
replacement ors in iron ore, whether it's oil and gas,
we are seeing really strong pipelines within that space. So
we ask genuine seeing a lot of opportunities. So to
your question around cash ranges, we're probably sitting around kind
of the mid the mid range to the lower of
(24:01):
those of that cash range, depending on the funds, because
we genuinely see quite a lot of opportunities at the moment.
Speaker 2 (24:07):
Thank you, Michelle for being on this episode of Shared Lunch.
It's been great to have you on now.
Speaker 1 (24:12):
It's a pleasure always, I'm always happy to be here.
No one's all in. No one's like it's going to
keep going or actually there's quite a level of conservatism.
There is risk obviously with all this tariff and stimulus
coming through, that we're going to go through another period
of heightened inflation. I think that's a real risk depending
on what part of the Australian market you look at.
We're up sort of twenty to forty percent, so everyone
(00:22):
that's the god can't keep going. And it's done so well, well,
it's done so well since the absolute lows of people,
but it's still quite really cycle.
Speaker 2 (00:30):
Hi, welcome to Shared Lunch, brought to you by Chasis.
I'm Jackie Newman, head of Capital Markets at Chaz's. Today
we're welcoming back Michelle Lopez, head of Australasian Equities and
portfolio manager at PIE Funds.
Speaker 3 (00:47):
Investing involves the risk you might lose the money you
start with. We recommend talking to a licensed financial advisor.
We also recommend reading product disclosure documents before deciding to invest.
Everything you're about to see and here as current at
the time of recording.
Speaker 2 (01:01):
Before we get started, I want to acknowledge the gaddigle
people of the EURA nation, the traditional custodians of the land, water,
and sky from where we're filming today, and pay respects
to elders past and present. Hi Michelle, great to have
you back with us. Thank you for joining. Last time
we had you on the Liberation Day, tariffs had just
(01:24):
been announced and markets were quite volatile. Fair to say
that there is still some noise around tariffs and uncertainty persist,
but by and large it feels like volatility has somewhat abated,
and indeed we've seen markets rally in the last few months.
Looking at it through your expert lens, how would you
(01:46):
characterize global equity market conditions at the moment?
Speaker 1 (01:51):
Buoyant still, but it's quite incredible looking back on the
last six months. The market's kind of been linear since
and on an upwood trajectory, and a lot of the
indices you know, there's and P five hundred being the
main one globally US based. It's been quite a narrow
(02:12):
still performance period. So by narrow, I mean a select
few type of companies very much those leverage to AI,
the big tech companies in Magnificent seven that everyone keeps
talking about, they're still driving the rally. When we sort
of think about conditions. What's really sort of propelled that
is obviously a lot of the political side of things.
(02:35):
We've got a bit more line of sight around tariffs.
There is policy changes happening on a daily basis, though,
so there are certain sectors that are being affected more
than others. Healthcare is the sector in the US and
globally in fact, because you know, it is a global
sector that is still sort of finding its way through
new tariff announcements. So I certainly don't think that it's
(02:59):
all a clear and green light ahead. But you know,
as we've seen in indocry performances and specific companies, it
has been a really buoyant time to be in the
market over the last six months. The other thing i'd say, though,
it's not it's not a uniform kind of positive sentiment
(03:20):
out there. In fact, when I speak to a lot
of my peers and a lot of my colleagues, no
one's all in. No one's like this is you know
it's going to keep going? Or actually there's quite a
level of conservatism that I'm that I'm seeing and I'm hearing,
and I have it, and I share that level of
conservativesm myself and there's there's a few factors driving that.
(03:43):
We're also starting to see, you know, revisions to the
employment market, so that unemployment number in the US specifically
being revised upwards. More recently, we've had you know, unemployment
TI cup in Australia as well to four and a
half percent. A lot of capital has come into our market,
and you know, stepping outside of the equity market, you've
(04:06):
got private credit which has seen a huge influx. There's crypto,
there's and everything feels like it's going up at the moment,
but the sentiment I think is quite bifurcated. You've got
some concerns and then you've got some people that are
amor thematic driven AI. Anything that has AI connected to
(04:26):
it in some way seems to be doing really well.
Speaker 2 (04:29):
So if you take a closer look at the Australian market,
how would you say that it looks relative to other
offshore markets at the moment? And I guess what I'm
saying is, would you say that now is a good
time to be more or less invested in local stocks?
Speaker 1 (04:45):
Our market's quite different to the global market, and I'm
saying global a lot of it is very much still
US driven, in the sense that AI and tech is
a very big part of that market. We don't have
that in Australia or New Zealand. In fact, when you
(05:05):
look at the large cap part of the market, it's
you know, the big four banks, We've got some supermarkets,
We've had some healthcare names in there as well, West Farmers,
so very different drivers. That part of the market has
done exceptionally well over the last four years. And in fact,
(05:26):
what we've seen more recently over the last three months
call it six months, as large caps and those big
blue chip companies in Australia probably not do so well.
At the other end, which is small caps, it's a
much much broader composition within that part of the market.
And what's driven small caps over the last twelve months,
(05:48):
and I'll probably drill it down to three things. It's commodities,
specifically gold, It's anything kind of defense related, and technology
as well. And we're starting to see again the underperformance
that we've had in small caps over the last four
years start to unwind a bit and catch up. You ask,
(06:09):
is it a good time? It is because it's broadening out.
So I said that the global rally has been very
much driven by these larger companies, tech AI, all of that.
We're starting to see that broadened out in Australia. And
what's driving that is economic conditions, interest rates. So as
(06:29):
New Zealand, as most of the developed world actually is
cutting rates, we're in that cycle too. And what that
effectively means is you've got a lot more sort of
macro support and economic support and stimulus coming through. So
I think it is an interesting time depending on what
part of the Australian market you look at. We're up
sort of twenty to forty percent from the lows in April,
(06:53):
but on a yearly basis, on a twelve month basis,
you know, the large cap is up maybe eight percent
and the small cap is maybe up eighteen percent. So
it's not euphoric in any way. So everyone that's saying, oh,
I can't keep going and it's done so well, well,
it's done so well since the absolute lows of April,
but it's still quite early cycle.
Speaker 2 (07:14):
So do you feel as though there is a likelihood
that small caps will continue this outperformance? What's your sense
on how that will play out in the next twelve
months or so, just looking at the economic picture and
other factors. Yeah, I do.
Speaker 1 (07:28):
I do think it will continue. But let me tell
you why, because I think sort of the reasoning is
probably more important what drives small caps and if I
sort of outlined those kind of macro settings, So you've
got interest rates coming down, why is that a positive
for small caps? Well, three reasons. Firstly, cost of debt
(07:51):
is cheaper. A lot of these small caps rely on
debt funding to grow, so either capital expenditures or m
and A or whatever the case may be for capital allocation,
it's gotten cheaper. And typically the term on the debt
is shorter because bank's not willing to lend out five
ten years for more sort of riskier assets or companies,
(08:14):
so they're refinancing at much lower rates and that directly
falls through to the bottom line from an earnings perspective.
The second thing is the consumer. So the consumer underpins
small caps in a big way. As you would know,
if your interest rate on your mortgage is going down,
then you've got a lot more discretionary spend, so it
kind of goes across the board. And then thirdly, valuations,
(08:36):
So a way to value a company is discounting its
earnings back to the present, So future earnings back to
the present. The discount rate that you use is tied
to cash rates, so effectively there's a direct correlation lower
indirect correlation lower rates, higher valuations. So there are three
(08:57):
things and why that affects small caps more and positively
impact small caps more than large caps, So we have
a rate cutting cycle. The other thing i'd say, and
I came back to small caps being a much broader
reflection of our economy. Commodities is a big part of
that index, so it's probably worth touching on that separately.
(09:21):
But you've got everything from consumer stocks, discretionary, you've got contractors,
you have healthcare, you have tech, and it's a real
property and it's just a much more balanced view. So
when we're in constructive economic backdrop like we are now,
you've got fiscal stimulus, you've got monetary policy easing, and yes,
(09:44):
unemployment I mentioned sticking up a little bit, but it's
still very supportive and that all plays into sort of
a positive outlook for small caps, i'd say more so
than large So yeah, I think over the next twelve
months longer out it is very it is sickly coll
part of the market, so it's not forever, but yeah,
I think for the next twelve months to frame the
(10:06):
timing there, there's still scope to continue the outperformance.
Speaker 2 (10:09):
I guess if we could zoom in on some of
those sectors that you mentioned around and the themes around
lower interest rates and a more positive consumer. Firstly around
our interest rates, are there any particular sort of sub
sectors or stocks even that you're focused on that you
think are sort of leveraged to this lower rate environment
(10:31):
that we're in and with rates expected to go even lower.
Speaker 1 (10:35):
As a house Pythons really does look at companies on
a case by case basis, so we are very much fundamental,
bottom up investors, and it's all about the company. Having
said that, though, we wouldn't be doing our job properly
if we didn't recognize the industry that they're participating in,
and it's a very big part of the assessment that
(10:57):
we undertake of the company. So there are absolutely industries
or sectors that benefit more. A very simple one to
understand is property. So we've had a lot of our
rates trading at very steep discounts to their NTA, their
net tangible assets. So the backing the property of backing,
(11:20):
so anywhere between you know, twenty all the way down
to fifty percent discounts. So what a rate cutting cycle
implies is, obviously you're able to take our debt to
actually drive growth within sort of the property sector. And obviously,
as I mentioned before, the debt that you do becomes cheaper,
(11:40):
so you have earning secretion come through. So that's a
very very easy one to understand. But then there's second
order effects of it. So you've got the consumer consumer discretionary.
That's a part of the market where we've got more
money in our pockets, we can go out, we can
spend more, and how that filters through is across multiple
of sector. But you know, retailers, at the August reporting
(12:03):
season that just passed, retailers had a really good period
and we've started to see retailers post positive same store
sales growth all like for like growth in their revenue
in their sales. So that's a direct indication. And in fact,
we were starting to see our retailers that had operations
(12:24):
in New Zealand post really positive numbers. So anywhere between
sort of fifteen to thirty percent growth. I don't want
to get overly excited because these aren't kind of the
incumbents in the New Zealand market, it's you know, UJB,
high fives, ARB Nick scale. They are sort of cracking
that market and probably the growth, but they were going
(12:46):
backwards not that long ago. So we did start to
see grain shoots in our retailers and I think that
they are very rate sensitive.
Speaker 2 (12:53):
Are there any other consumer sub sectors, whether it be
trouble or you know, retail, specialty retail or anything like that,
any sectors sub sectors that are piquing your interest.
Speaker 1 (13:05):
Travel's tricky because travel's global and we've had a lot
of disruption across kind of global channels. And when I
look at the travel sector for US, there's the leisure
and then you've got your corporate travel. And the corporate side,
with all the geopolitical uncertainty that we've had, has really
(13:29):
come off. Leisure not so much, but it's still not
as exuberant as it has been probably over the last
twelve twenty four months, right, So I think that's a
trickier part, and there's lots of moving parts to that.
So I think travel looks interesting from evaluation perspective. A
(13:51):
number of our listed travel names are starting to screen
quite attractively, and I think it's a part of the market.
We're doing work on retail. Even within retail, you've got
different categories. So electronics, we're going through a big replacement cycle.
COVID four years ago, probably a lot of people bought
(14:11):
a laptop to work from home, whatever it is, and
that replacement cycle is kicking in Windows ten I think
are no longer rolling out or servicing that application, so
again another another reason to go out and buy. Then
we've got things that are leveraged to property. Property has
been interesting in Australia. I know it's been very tricky
(14:33):
and challenged. In New Zealand, we actually held up really
well up until about twelve months ago and then it's
just kind of flatlined. It's probably down a little bit,
but not kind of the twenty percent moves thirty percent
that we've seen in New Zealand. But we're starting to
see a bit of recovery in that space too, so
that filters down to your home, wears furniture. So yeah,
(14:54):
they're the parts that I'd say, I think at this
point in the cycle should continue to do well.
Speaker 2 (14:59):
And if we think about resources, you know, the resources
sector makes up a large component of the Small Worlds index,
and we've seen gold rally significantly this year if we
look at that sub sector. Are there any opportunities that
you're looking at in terms of gold stocks or commodities
more generally, where are you sort of focused on? At
(15:20):
the moment?
Speaker 1 (15:21):
Gold has been exceptional And you know, the interesting thing
about gold is it's typically thought of as a as
a safe haven, and the constructive backdrop for gold is
weaker dollar, lower interest rates, and uncertainty geo political uncertainty,
and that's all sort of played out, but it's gone
(15:43):
well above and beyond I think what the fundamental constructive
backdrop is, which may indicate a couple of things. People
are genuinely worried, and that safe haven status continues inflation,
so inflation risk gold is seen as a hedge for inflation.
(16:03):
So even though it's sort of down into ranges where
central banks wanted to get them down to, there is
risk obviously with all this tariff and stimulus coming through
that we're going to go through another period of heightened inflation.
I think that's a real risk. So there's people buying
on sort of fundamentals, but then you've started to see
(16:26):
a bit of euphoric activity. And it's interesting Martin Place
just here in town. I'm sure you've seen sort of
the pictures. There's light lines out the door. Is it
a bubble? I don't think so. Can it correct twenty
thirty percent? I think so. So. Bringing it back to
the markets, the goal price itself, I think I'll have
to I'll have to check this. I didn't check it
before I came in, but I think the gold price
(16:47):
is up something like fifty percent. Gold equities are up
one hundred percent over the last year. And what we've
seen within that, and that's typical. There's lev there's operating leverage,
there's financial leverage, and in fact, the ones that have
done best are your poorer quality ones that you know,
(17:08):
high high cash cost to operate, which means that the
leverage that they get from a higher goal price is
more than sort of your good quality operators. But you've
done well owning anything gold related over this period. Other commodities.
I think I spoke about rare earths six months ago.
That's had an exceptional run that's been quite politically driven
(17:33):
as well. That the price itself hasn't moved too much.
So that's a situation that we're cautious on because again
it's a critical metal. It's strategically important for a number
of these industries that are in big sort of growth trajectory.
But when the fundamental commodity price doesn't move, it can
(17:56):
easily sort of whip back down. So we're quite careful
and mindful of that. Lithium is still quite challenged. We
had sort of a big as a little sort of
run up fifty percent, but that's kind of platted out
and that you have to bring it back to supply
and demand dynamics in a lot of those markets. But yes,
(18:18):
you can't avoid it, and unfortunately, being underweight that part
of the market for us, we've done, it's proudly done
quite well to be able to sort of hold the
performance and deliver exceptional performance without owning lots of those
companies that are run a lot.
Speaker 2 (18:36):
I want to talk about AI. It's very topical you
know in the media at the moment. Would you say
that there are ways to play that thematic more indirectly
across our markets.
Speaker 1 (18:49):
There's certainly companies in the AI space, it's just not
the concentrated nature in the large caps that we see
offshore the very obvious one is data centers, so there
is certainly small cap all the way through to large
cap in Goodman Group, who have now become one of
(19:10):
the largest DC operators or developers. Sorry, so you do.
You've got you know, even in New Zealand in Fertilla
and a fifty percent stake in thereabouts stake in CDC.
CDC are an exceptional operator of data centers, and you've
got next DC as a mid cap in Australia, then
(19:31):
you've got Macroi Telecom sort of small cap, so that's
kind of a very direct way of playing it. There
is a massive amount of capital going into data centers
at the moment, and even just yesterday, CDC announced another
forty megawatt contract. The week before they announced one hundred
or the week for that one hundred megawatt contract, so
(19:52):
there is absolutely no shortage of demand from that, and
it seems that there's no shortage of capital that wants
to be invested in this space as well. So at
the moment there is clearly more demand than there is
supply by far, but at some point that will sort
of even out. I'm not expecting that at least for
(20:14):
the next three years, but at some point that will happen.
And the one thing I would note as a signal
to maybe pull back a little bit is when you
start to hear your big hyperscalers, your Amazon, your Google
cutting back there on their capex on AI. That's quite
a negative signal coming back to kind of opportunities. So
you've got data centers, then you've got a lot of
(20:36):
these companies that are internally generating products that are AI
enabled or to help their customers and clients be more efficient.
Here it's zero is a typical. They've got Agentic AI
module for their accountants using the software. You've got Wise
(20:56):
Tech that are coming out, which is logistics company. And
then more in the small and microcraft you've got Life
through sixty that are using sort of AI as well
with their application of tracking their tracking software. So it
goes the whole way through. So you can absolutely get
(21:18):
access to it. It's just more not those hyperscalers that
we have here that we can invest in. But there's
certainly ways and I would be shocked if fifty percent
of the company is that we are invested in don't
have some form of AI now embedded into their workflows.
Speaker 2 (21:37):
A good barometer for institutional investor confidence in the outlook
for markets are the cash balances that they hold. Last
time we spoke to you, you mentioned that across some
of the PI funds you were at or close to
mandate limits in terms of those cash balances, just given
some caution around markets. How would you say that has
(22:02):
changed in the last six months? Would you say that
you've got a lot of dry powder or cash on
the sidelines still? How fully invested are you?
Speaker 1 (22:13):
Yeah, we're very fortunate that our mandate allows us to
move as much into cash as we would like to,
depending on how we see the environment, what we have.
There are internal ranges that we like to operate in,
but those ranges change. So if sort of sort of
post COVID, that range went up to fifty percent, so
(22:34):
we could own up to fifty percent. Back in April,
we increase the range from I believe it was five
to fifteen percent, and we're sort of sitting at that
higher end. That range still holds today, but we're probably
more towards the mid to bottom end. We were very
fortunate that we're able to allocate and take up some
(22:54):
opportunities in the market. Now. Typically speaking, we are taking
a bit of profit in those names that are up
thirty forty percent, but we're seeing lots of opportunities. We're
genuinely seeing lots of opportunities coming out of reporting season
in August. We didn't touch on the contractors, but there's
anything real leverage to infrastructure. Infrastructure isn't just kind of
(23:18):
building roads and tunnels and that. It's it's electricity grid
and you know this whole electrification and talking about data
centers for example, the need of energy for those centers
to be built. There's been a massive investment in transmission
that's required. So that's what I mean sort of by infrastructure.
(23:38):
The contractors, whether it's you know, gold mining, whether it's
replacement ors in iron ore, whether it's oil and gas,
we are seeing really strong pipelines within that space. So
we ask genuine seeing a lot of opportunities. So to
your question around cash ranges, we're probably sitting around kind
of the mid the mid range to the lower of
(24:01):
those of that cash range, depending on the funds, because
we genuinely see quite a lot of opportunities at the moment.
Speaker 2 (24:07):
Thank you, Michelle for being on this episode of Shared Lunch.
It's been great to have you on now.
Speaker 1 (24:12):
It's a pleasure always, I'm always happy to be here.
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