Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Eley Griffiths portfolio manager Nick Guidera warns investors which factors to look out for in 2023.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Nick Guidera: The Eley Griffiths Group Emerging Companies Fund invests in the smaller end of the Australian & New Zealand equities market — listed companies that are at an earlier stage of their lifecycle or growth journey. Typically these stocks are outside S&P/ASX 200 Index (ASX: XJO).
The fund typically consists of 35 to 55 stocks with an average market capitalisation as at 31 October 2022 of around $700 million.
The fund aims to outperform the S&P/ASX Small Ordinaries Accumulation Index (ASX: XSOA) over a rolling five-year period.
Eley Griffiths is a style-agnostic manager, meaning we can invest in both growth and value stocks, which is important through the cycle. We also look to invest across sectors, including resource and energy stocks, which are a large proportion of the S&P/ASX small ordinaries accumulation index.
We have an experienced and incredibly capable investment team that spends time researching and modelling small and emerging companies to identify the next successful listed company that is early in its life cycle. The team has traversed many market cycles, and is acutely aware of the factors that impact the smaller end of the Australian equities market — liquidity, volatility.
This fund is appropriate for investors with "high" and "very high" risk and return profiles. This means an investor in the fund is typically prepared to accept high risk in the pursuit of capital growth with a medium to long investment timeframe. No returns are guaranteed.
Investors should refer to the target market determination and product disclosure statement for further information or making an investment decision — these are available on our website.
MF: Where do you think the market is heading?
NG: Markets are at a very interesting juncture right now. After dominating most of 2022, we expect the macro — central banks, economic data releases, bond yields, currencies — to continue to dictate the equity market direction in the months to come.
This means we are likely to see continued volatility, selective outperformance from stocks and sectors with solid fundamentals that are insulated from the macro, and a requirement as investors to continue to be nimble and open-minded to the ever-changing market backdrop.
For context, central banks globally appear closer to the end of the tightening cycle than the beginning with the pace and size of interest rate hikes set to slow significantly into 2023.
The impact of tightening policy is being felt in economies all over the world with economic surveys pointing to a slowdown in demand for new orders, higher mortgage rates slowing housing markets, and in the US, consumers beginning to slow their retail spending. Locally, the consumer continues to be robust according to some recent company releases from Australian retailers — but the future does contain some uncertainty.
China is showing signs of reopening its economy at a rapid pace, and loosening monetary policy to stimulate growth, at a time when almost every other bank is still maintaining higher rates. At a time when growth globally is seemingly harder to come by, the potential growth opportunity of this reopening may be tempting for many.
A recession in the US and Europe is now consensus among global economists. However, the timing and the severity is questionable.
Despite the economic challenges that persist, inflation remains elevated, albeit declining, and labour markets remain tight — unemployment low. Both these factors suggest central bankers will continue to need to raise rates in the coming months and maintain these tighter policy settings for longer.
Small-cap investors had a tough 2022, with the index down more than 20%; as such, valuations have been reset in some sectors.
Reporting season, which is due to kick off in February, will give further insights to investors as to whether the earnings expectations for smaller companies need to be revised down for 2023.
The outlook for earnings and the macro backdrop will ultimately dictate the direction of the market in 2023.
