Top Fund Managers big themes for 2013 Part II
Under the Radar spoke to two of the best small-cap fund managers in the market, Jack Collopy, of Perpetual, and Chris Prunty, of Ausbil Dexia, to get their thoughts on the big themes likely to affect little companies next year.
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Under the Radar spoke to two of the best small-cap fund managers in the market, Jack Collopy, of Perpetual, and Chris Prunty, of Ausbil Dexia, to get their thoughts on the big themes likely to affect little companies next year.

Average stock prices (that is, equity market indexes) are all about expectations regarding where the world is headed in economic and financial terms. Below is a list of five forces driving those expectations (the first five were in last Friday's column).

Collopy and Prunty know well that you need to be ahead of the game when it comes to forces affecting the market. For example, if the market expectations for a consumer spending increase are not realised, you want to make sure that you're not too exposed to retail stocks.

Here are the five remaining big themes they predict will shape the market in 2013:

Theme 6: East coast recovery

Cuts, cuts, cuts ... You will have heard this theme come up as a rallying call for optimism from stockbrokers all around the country. These market bulls are hoping that official interest rate cuts are the panacea for many industries that sell directly to the consumer.

Collopy seems to be one of these bulls: “Interest cuts have worked in the past, and it should underpin growth in the domestic economy.”

Prunty is less sanguine: “We've yet to see evidence of the housing recovery. That theme may be true but it's hard to find quality stocks to buy to take advantage of this.”

While Boral historically hasn't been a small-cap, it's getting smaller due to the load of debt it is carrying. But it remains a building and construction company with a dominant position in Australia, as well as exposure to the giant US market.

James Hardie Industries has more exposure to the US than Boral, but would also benefit from an improvement in the domestic housing market. Brickworks is another building and construction company, but it has a cross shareholding with Washing H Soul Patterson, which complicates matters.

Theme 7: Markets are predicting an increase in consumer confidence

The word from retail land was not good for October, as far as sales were concerned, but there is a ray of sunlight for the embattled sector. The electronics retailer JB Hi Fi says its gross margins are holding, which might be a sign the sector's profits are bottoming out.

Collopy says markets are pricing in a recovery in retail stocks, but again Prunty is more circumspect: “You might see a cyclical bounce, but you have to take into account the long-term structural decline of certain retail categories.”

Theme 8: Pressure on rents

Radar is seeing definite evidence of bricks-and-mortar retailers putting pressure on landlords. Not only are tenants getting lower rents, but they are also getting better sites for less and better lease terms.

The chief executive of the furniture retailer Nick Scali, Anthony Scali, tells Under the Radar that now is the time to expand because the rents are 20 per cent lower than this time last year.

“A lot of furniture retailers are hurting, and a lot are exiting. If you're a landlord and you lose a tenant, it's not easy to backfill. There are good opportunities and now is a good time to roll out stores.”

Theme 9: Margin squeeze in mining services

Far from seeing as a negative the downward pressure on profit margins that resources companies are putting on mining service providers, both Collopy and Prunty see it as an opportunity to hunt for bargains.

Prunty: "With a few exceptions, mining services' margins are coming down but the market has already dramatically de-rated these stocks in anticipation."

Collopy makes the point that the margin squeeze has been particularly pronounced in construction, which depresses the profits of the likes of Leighton Holdings and Monadelphous.

His fund has a big holding in RCR Tomlinson, which is an engineering company focused on the design and maintenance of heavy equipment used in production and processing. RCR's stock has bounced 16 per cent in the past month or so, but at $1.86 remains below its 12-month high of $2.20 which it hit in early April.

Theme 10: A change of government

The election is slated for late 2013 and while a week is a long time in politics, as the saying goes, that doesn't stop investors pricing in expectations for a winner.

Prunty simply says that “markets hate uncertainty” but Collopy is more forthcoming and says that in expectation of a Coalition government, we should see companies in the private health space, like NIB Holdings, rally.

With a shareholding of 41 per cent in NIB, you can see why Collopy and his team might be rooting for Tony Abbott.

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