Caution surrounds extreme stock valuations

Backing small-cap companies has helped the DNR Capital Australian Emerging Companies fund achieve positive returns. 

The fund was focused on cyclical areas of the market like resources and consumer discretionary stocks, on stocks which would benefit from the normalisation of the pandemic and on attractively-priced quality growth stocks. 

It held between 20 to 45 stocks in the portfolio and the manager looked for quality small-cap companies with strong balance sheets that were able to reinvest capital and achieve pricing power. 

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Sam Twidale, portfolio manager, said: “Given the lessons learnt following the Global Financial Crisis when a number of economies suffered double-dip recessions and anaemic growth, there appears limited appetite to tighten policy too prematurely. This is providing a supportive environment for equities and general risk appetite levels. 

“However, we remain cautious on those areas of extreme valuation, with many of the secular growth stocks still on elevated valuations and with optimistic earnings forecasts.  

“A key risk surrounding the market outlook is a pickup in inflation, especially given the unprecedented scale of the stimulus measures. A number of companies are already warning of increased inflationary pressures, which we expect to build further as the global economy recovers and capacity utilisation tightens.” 

According to FE Analytics, the DNR Capital Australian Emerging Companies fund returned 55.9% over one year to 30 April, 2021, versus returns by the small and mid-cap sector of 54.9% within the Australian Core Strategies universe.  

Performance of DNR Capital Australian Emerging Companies versus sector over one year to 30 April 2021 

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