Speaker 0:
so the performance of small caps relative to large caps tends to be correlated to the economic cycle to economic activity. And so the last couple of years have been a tough, uh, backdrop for for small cap investing, uh, the economy, uh, most economies around the world have been slowing from from that, um, post pandemic, stimulus driven rally that that we saw in 2020 2021. Uh, and economic growth, um, is now slowed to

Speaker 0:
to close to zero in most western economies.

Speaker 0:
Um,

Speaker 0:
and we know, looking at past cycles, that small cap performance, uh, they underperform going into a downturn. But they usually outperform coming out. And that low point is is in a recession, uh, often just a few months into a recession. So we think we're now getting very close to the bottom of the cycle, given that we're 18 months, two years into this slowdown, um, the

Speaker 0:
the downturn that the bear market in the in the G F. C in 2008, 2009 was about 18 months, two years old, So a similar time frame

Speaker 0:
in 2000, 2002, it was more like three years so it could run on for a few months here. But we think we're in the part of the cycle to start, uh, thinking about increasing your small cap exposure.

Speaker 0:
So what we're we're looking for is we want to start to see evidence of an inflexion in economic growth. Economic growth, as I said, has been slowing the last couple of years. And, um, we it's slowed to about 0%. I think the key question now is will growth turn negative and we'll get a recession.

Speaker 0:
Um, and I I don't know the answer to that, but I think we're, uh, given that we've had a number of, uh, interest rate hikes over the last year, 18 months. I think that I think that will come through. And we will see that in very short order here in the next few months. So we'll get some resolution as to whether the economy is going into recession or whether it's going to bottom out and and get an inflexion.

Speaker 0:
So, um, indicators that I'm watching to to suggest that that inflexion is coming would be looking at forward looking indicators like purchasing managers surveys, um in In general, in most countries these have been declining and below the critical 50 level. But recently in the US and Germany and Japan, they the last data point was a tick up so that that's interesting.

Speaker 0:
Uh, signals from the bond market uh uh are very useful. Long bond yields, uh, look like they've peaked. Real interest rates look like they've peaked. And the yield curve, which has been inverted, uh, since last year and is a good indicator of of a slowdown to come, is now starting to steepen again. Um, which is an indication that the market is starting to expect interest rate cuts and and easier policy, which again would would help, um, economic grow and corporate profits.

Speaker 0:
I mean, other things to watch would be, um, commodity prices. So the, uh, industrial commodities like oil, copper, zinc, lead, things like that. And in general, they are all still falling. So we haven't had a positive signal there. Um, watching cyclical stocks and sectors versus more defensive stocks is another good one. And in general, cyclical in industry cyclical sectors like energy, metals and mining,

Speaker 0:
the bank sector, capital goods, transportation have been underperforming, more defensive sectors like utilities and consumer staples.

Speaker 0:
Um, so those are the things we're watching amongst many others. And, uh, as I say, I think we're we're within a few months here of of finding a low point.

Speaker 0:
So, uh, the the forward 12 month price to earnings multiple for global small caps is just over 15 times today. And that compares to a 10 year average of about 21 times Uh, and a 10 year low of just over 13 times. So in an absolute sense, valuations look pretty reasonable here and relative to global large cap stocks.

Speaker 0:
Uh, small caps tend to trade at a premium. Uh, over the last 10 years, the average has been about a 25% premium, and today they're at a 5% discount.

Speaker 0:
So relative to large caps are looking very attractive that that's actually a 10 year low. So, in both absolute and relative terms, small caps looking attractive. The big question is whether the the E the earnings that feed into that multiple are have further downside. Um, and you know that that's what we we we talked about as to whether the economy might continue to to slide into recession here. But when the market starts gaining confidence that,

Speaker 0:
uh, the earnings are supported, then I think you'll begin to see multiple expansion in a decent rally in small caps.

Speaker 0:
So the the theme the main theme of the last uh, 12, 18 months has been to be positioned defensively, we've very much been in capital preservation mode, uh, so focused on profitable good quality companies, um, that have resilient recurring revenues and earnings, uh, solid balance sheets, good cash flows and so on.

Speaker 0:
Um, but there there have been some some, uh, good niche bull markets as well that we've been taking advantage of. Uh, I mean, one of the more recent themes has been a I artificial intelligence that you're seeing more and more in in the news A I through applications like chat G BT, um, require a lot of computing processing power to operate them, and that requires high performance semiconductor chips.

Speaker 0:
Um, we own a a Taiwanese chip designer that that designs and ultimately makes, uh, those. So that's been a beneficiary. Um, other interesting themes, uh, one of them is is satellite communication. So something that's coming through this year is in high end smartphones. You can now be connected, uh, to your network anywhere in the world where if you're in a

Speaker 0:
in A in a spot where there's no coverage, you can connect via satellite. So that capability now exists. And we own a satellite network provider in the fund.

Speaker 0:
And then, perhaps a again. A theme that's been coming through more and more in recent months has been, uh, uh uh, leisure travel.

Speaker 0:
So since the end of the pandemic, we've all wanted to go on holiday again and and travel. So there's been that cyclical rebound. But one thing that's become increasingly clear is that we as consumers, are prioritising our our our leisure travel and our our holidays more. Um, so whereas other areas of consumer spending have been slowing, uh, leisure travel has remained relatively resilient and and and still growing strongly. Um, so we have exposure to that in the fund through an online travel agency,

Speaker 0:
uh, a travel luggage company. Um,

Speaker 0:
and we also own a tolling business. Uh, that helps the rental car industry