The Point

Crispin Murray: What’s driving the ASX this week

Aussie equities: Why conditions are favouring smaller companies again

ASX small caps are once again outperforming their large-cap counterparts after a period of underperformance in recent years.

In a short video, Pendal PMs Lewis Edgley and Patrick Teodorowski explain why small caps underperformed, how conditions have changed and what they’re doing to take advantage.

A rapid post-pandemic rate-rise cycle benefited large caps such as banks and insurers, while recession fears put investors off smaller companies.

But this year, as recession fears dissipated and inflation began moderating, investors regained interest in small caps.

“We’ve also subsequently seen earnings hold up significantly better than investors feared, says Lewis.

“More fundamentally, over the past two earnings seasons we’ve seen greater resilience out of the more cyclical companies within our index.”

Julia Forrest: What’s driving Aussie equities this week

LAST week was a big one for macro data.

In the US, headline Q1 2024 Gross Domestic Product (GDP) growth came in relatively soft at 1.6%, versus 3.4% in the prior quarter and 2.5% as was expected.

At the same time, the Q1 Core Personal Consumption Expenditure (PCE) deflator – a measure of inflation – accelerated to 3.7% annualised, versus 2% in Q4 2023 and the 3.4% expected.

As a result, US bond yields continued their climb, with ten-year Treasury yields ending up five basis points (bps) for the week at 4.67% and the market increasingly implying a first rate cut by the Fed in December.

Chicago Federal Reserve (the Fed) President Austan Goolsbee said that the Federal Open Market Committee needs to “recalibrate” its stance – noting that “progress on inflation has stalled” in 2024 and that after three months, this signal “cannot be dismissed”.

Jim Taylor: What’s driving ASX stocks this week?

Emerging Markets: Mexico and Brazil could benefit from bigger-than-expected rate cuts

Pendal’s emerging markets team expects significant interest rate cuts in Mexico and Brazil, increasing their attractiveness to investors.

Although many developed and emerging markets have been cautious on lowering rates, Latin America has embarked on a broad rate-cutting cycle including Mexico last month.

“It’s true that some Latin American central banks that were quick to cut are now turning more cautious — notably Chile and Peru,” says James.

“But we believe Mexico and Brazil should both be able to deliver hundreds of basis points of cuts in policy interest rates over the next 24 months.”

Rates in both countries should come in much lower than consensus expectations in coming quarters, James says.

“This should bring an even more-positive boost to economies, corporate earnings and equity market returns.”

TIM HEXT: Investors should position now for lower rates later this year