ASX midcaps: It’s a good time to focus on interest rate-sensitive growth stocks

The domestic economy, and potential rate cuts, augur well for mid and small caps. But investors need to be selective about what they buy, argues portfolio manager BRENTON SAUNDERS

• Domestic macro-outlook positive for mid and small caps
• REITs, select retailers and quality growth companies to benefit most
• Find out about Pendal MidCap Fund

THERE is now a helpful macro tailwind for domestic focused companies driven by the prospect of more interest rate cuts and high fiscal spend, says Pendal portfolio manager Brenton Saunders.

“The main issue outstanding, from a domestic perspective, is valuation. That’s a constant nagging question in the back of investors’ minds”, he says.

The S&P/ASX200 in recent days has hit a new record and some stocks, notably market leader Commonwealth Bank, are trading are historically high multiples.

Domestic outlook

“The international landscape remains complex, but the domestic economy is panning out pretty well,” Saunders says.

“We are through the election and companies that don’t have unanswered questions around tariffs can be reasonably confident about the second half of 2025, particularly if the playbook sees a couple more rate cuts.”

Sustainable, self-funded growth companies

With that macro-economic backdrop, what types of stocks should investors be looking for?

“It comes back to a few key thematics. Companies with reliable growth, that are self-funded, in growth parts of the economy,” Saunders says.

“We will play the interest rate cycle through selected REITs (real estate investment trusts) and growth stocks that have longer duration and benefit from lower discount and interest rates.”

He nominates tracking company Life 360 and software group Technology One as examples of well-run, high-quality companies with a positive, sustainable earnings outlook. Buy now, pay later group ZIP is another example.

“ZIP is growing very strongly, and it currently has very low penetration in the US so there is opportunity,” Saunders says.

Discretionary retailers

Discretionary retailers should also benefit from the interest rate environment, but Saunders cautions investors need to be discerning about what they buy.

“In this space you need to be a little bit more circumspect. Apparel is very tough. There’s a lot of discounting and plenty of competition. There’s also a couple of new apparel and sportswear retailers wanting to come to Australia.”

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By contrast, car dealership group Eagers Automotive has done very well in 2025 and should benefit from lower interest rates, Saunders says.

“There have been two specific things going on in that stock. The biggest one is BYD volumes, and secondly, margins haven’t fallen as precipitously as expected in both new and used car sales.”

REITs

The real estate investment trusts (REITs) benefit from lower interest rate cycles, Saunders says, and should do well in the second half of the year. He says investors are slightly wary of data centre operators, in part due to outsized capital raisings last year and early this year.

“Also, the pace of writing new contracts stalled somewhat with the advent of the Deep Seek AI platform. This caused hyper-scalers like Microsoft to pause and rethink their infrastructure intensive approach.”

Life360, Technology One, Zip and Eagers Automotive are held in various Pendal portfolios.