It has been a tough year for small cap investors, with the S&P/ASX Small Ordinaries Index (ASX: XSO) down 23% over the past 12 months.
That fall, as painful as it is, has been cushioned by the epic performance of a handful of large commodity stocks, including the Core Lithium Ltd (ASX: CXO) share price surging 177% higher, the New Hope Corporation Limited (ASX: NHC) share price roaring 157% higher, and the Lake Resources N.L. (ASX: LKE) share price jumping 89% higher in the past year.
How New Hope shares – with its $5.7 billion market capitalisation – are included in the Small Ordinaries Index and are one of life's mysteries. Also a constituent of the S&P/ASX 200 Index (ASX: XJO), New Hope is around the 80th largest ASX-quoted company in the country.
Moving on…
Writing in its September monthly update, the Cyan C3G Fund notes the ongoing severe volatility in global markets, with the US stock market having now experienced its worst first nine months of a calendar year in 20 years.
If your portfolio is hurting, like mine, you'll know why.
It's even worse if you don't hold any of the hot lithium and coal stocks, like me, and the Cyan C3G Fund. Or you do hold some of the many big losers over the past 12 months, like the Aussie Broadband Ltd (ASX: ABB) share price slumping 59% or the Pinnacle Investment Management Group Ltd (ASX: PNI) share price falling 41%, like me.
Cyan C3G Fund portfolio managers Graeme Carson and Dean Fergie say "the Australian economy appears to be in a stronger position than some of its counterparts, but the financial markets aren't yet reflecting this."
That's certainly the case in the small-cap space, with the share prices of many companies down 60% or more despite some of them growing quickly, having good balance sheets with no debt, and being cash generative.
Or perhaps I'm just bemoaning the performance of the small and micro cap stocks in my portfolio…
Here's when stock markets could start to move higher…
Looking for a silver lining amongst these cloudiest of times, the Cyan C3G portfolio managers say that with the market already pricing in an upcoming economic slowdown, the hope is "financial markets will front-run the recovery just as they did the downturn… as they have with all bull and bear market cycles in the past."
As for the timing, as ever, no-one knows when markets will turn. That said, it may be sooner rather than later.
Cyan C3G believes "the most-likely first positive catalyst for a stock market recovery will be a line of sight as to when the interest rate hike cycle will end." The portfolio managers go on to say it is expected the US will end its cycle in the first quarter of calendar 2023, with Australia perhaps being a month or two earlier.
That's not too far away, and markets, being forward-looking beasts, could move higher before then.
If I was taking a guess – and it's nothing more than a guess – I reckon the stock market could be in for a big January as the so-called January Effect kicks into high gear.
As bottom-up stock pickers, the Cyan C3G portfolio managers are confident the companies in their portfolio will have materially stronger market share positions in their industry in years to come, irrespective of economic conditions.
The September monthly update outlines the investment rationale for some of the Cyan C3G key portfolio positions including…
Alcidion Group Ltd (ASX: ALC), a company building a strong position in the digitisation of hospital management systems, both administrative and clinical, in Australia and the much larger UK market. The Alcidion share price is down almost 60% over the past 12 months, yet Cyan say "the timing looks perfect to scale the business significantly over the next 2 years as governments drive the push towards technology in healthcare in a post-Covid environment."
Playside Studios Ltd (ASX: PLY) is an independent video game developer with "a business model based on work-for-hire, original IP development and new initiatives like a 3rd party publishing division," according to Cyan C3G. The Playside share price fell 25% in September, yet the fund managers believe the company "can deliver great returns to shareholders independently or as an M&A target in time (hopefully both). We see this as a unique opportunity to get exposure to these dynamics in the ASX listed space."
