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News.com.au
2 days ago
- News.com.au
Criterion: With rates cut looking a sure bet, small-cap stocks are biggest winners
Small caps generally fare well when interest rates fall, because they tend to be exposed to cyclical domestic sectors Rates are heading south to prevent the economy from overheating, rather than avoiding recession Yarra Capital Management names four preferred ASX small-cap plays This week's benign inflation figures have fired expectations that the Reserve Bank will announce an interest rate cut on Tuesday week. It would be amazing if the central bank did a BACO – Bullock Again Chickens Out – and maintained a neutral stance for the second month in a row. Along with mortgage holders, small cap investors will cheer on what's expected to be a series of cuts over the next 18 months. That's because of a strong correlation between lower rates and the health of small caps. 'Smaller companies tend to be exposed to the more cyclical elements of the economy, so benefit from reduced rates which stimulate demand,' says Yarra Capital Management's small caps portfolio co-manager Michael Steele. Wilson Asset Management's Oscar Oberg refers to the 'inherent leverage' of small caps, in that they typically carry more debt. 'This means that even the slightest economic tailwind can fall to the bottom line quickly and drive earnings upgrades.' Lower rates also mean a lower Australian dollar, as foreign investors seek better returns elsewhere. Rates are falling for the 'right' reason Steele says investors should consider why rates are reducing. The current round is more about inflation slowing – and the economy not overheating – rather than the nation falling into recession. That's why investors applauded the jobs numbers showing an uptick in unemployment (not that the affected workers will be cracking out the bubbly). In contrast the rate reductions during the global financial crisis and the pandemic were more about avoiding disaster. Steele adds the rates benefit not just discretionary retailer, but other exposures including construction and real estate income trusts (REITs). Driving higher returns Steele cites Eagers Automotive (ASX:APE), the nation's biggest car dealership, as one of the biggest interest rate beneficiaries. 'Over the last two years, industry profitability has dramatically reduced with selling new cars,' he says. 'But we are now at the bottom of the cycle, with reduced industry inventory volumes.' Lower rates tend to have an instant knock-on effect on new car sales. That's a plus for Eagers, given its franchises include the fast-growing Chinese brand BYD. But about half of Eagers' gross profit comes from servicing, which creates durable annuity income. Steele adds that freehold property accounts for about one-quarter of Eagers' enterprise value. The REIT way to invest in property About half of the property fund manager Centuria Capital's (ASX:CNI) share price is underpinned by it stake in related entities including Centuria Office and Centuria Industrial. Centuria also co-invests in other unlisted property assets. 'About 75% of assets under management are in closed-end vehicles or listed entities where it has effective control,' Steele says. 'That means there's a low level of outflow risks.' Lower rates benefit the overall REIT sector, which is seeing improving asset valuations after years of decline. But Steele says funds management REITs reap extra benefit. "When cycle turns up, they will get upside from fund management fees and property development," he says. 'Those earnings streams are at zero currently.' Construction group's rare appeal Steele describes construction materials play MAAS Group Holdings (ASX:MGH) (pronounced Mars) as a 'really interesting business'. MAAS operates regional quarrying operations (such as asphalt and aggregates) and has civil construction/plant hire and residential property development arms. The company's land bank of 8000 residential plots supports its $1.5 billion market cap. These are in high-growth lots locales such as Dubbo, Orange, Bathurst and Rockhampton. 'MAAS has a diversified business across three markets and all of them are attractive at the moment,' Steele says. MAAS also is an ASX rarity, given buyers swooped on building material plays CSR, Adbri and Boral. Judo moves deftly in SME market Pure-play small business lender Judo Capital Holdings (ASX:JDO) has blipped on investor radars, given the Big Four banks' elevated valuations. By not aligning itself to the hotly competed home loan market, Judo generates superior net interest margins. Of course Judo doesn't have the inherent security of a mortgage, so its risk managers need to be on top of their game. To date, Judo's delinquencies have been low – and risks should only moderate as rates come down. Steele says investors price Judo at book value. "This is a very attractive valuation compared to the big banks which are trading at significant premiums.'
ABC News
3 days ago
- ABC News
High Court rejects X appeal against notice to explain sharing of child abuse material
The High Court has rejected an appeal made by X Corp against a notice the tech company was given by the office of eSafety Commissioner Julie Inman Grant demanding an explanation about child abuse material shared on the social media platform X, formerly Twitter. Three federal judges on Thursday unanimously rejected X's appeal against a federal court decision made in October last year that the company was obliged to respond to the notice, which demanded details on how the Elon Musk-owned company was combating widespread child exploitation material. The tech company was also ordered to pay the commissioner's legal costs. Ms Inman Grant's office describes itself as the world's first government agency dedicated to keeping people safe online. The commissioner has also driven world-first legislation that will ban Australian children younger than 16 from social media platforms, including X, from December. The federal court case dates back to early 2023, when Ms Inman Grant asked some of the world's largest technology companies to report on what they were doing about child abuse material appearing on their platforms. A reporting notice, issued under Australia's Online Safety Act, was sent to Twitter in February that year. Twitter then merged with X the following month. Arguments presented to the court by X Corp against complying with the order included that Twitter no longer existed as a legal entity and that X did not carry its predecessor's regulatory obligations in Australia. Ms Inman Grant, a former Twitter employee, welcomed the ruling on Thursday. "This judgement confirms the obligations to comply with Australian regulations still apply, regardless of a foreign company's merger with another foreign company," she said in a statement. She said her agency would continue enforcing the Online Safety Act and "holding all tech companies to account without fear or favour, ensuring they comply with the laws of Australia." A lawyer representing X, Justin Quill, said he had not yet read the appeals court judges' reasons and could not comment on the possibility of a High Court appeal. The High Court only hears around 10 per cent of appeal applications, so the federal court full-bench decision could be final in X's case. X's media office did not immediately respond to an email request for comment on Thursday. In 2023, Ms Inman Grant's office fined X $610,500 for failing to fully explain how it tackled child exploitation content. X's response was considered incomplete or misleading. X refused to pay, and the penalty is the subject of a separate and ongoing federal court case. AP
AU Financial Review
5 days ago
- AU Financial Review
Albanese adds YouTube to social media ban for kids
Teenagers between the ages of 13 and 16 will be banned from creating YouTube accounts in a major policy backflip by the Albanese government as it prepares to implement a world-first higher minimum age to access social media platforms. The reversal, which was first reported by The Australian Financial Review last month, came after advice from eSafety Commissioner Julie Inman Grant, who found YouTube was the most widely used platform for young teens and the most likely place for them to encounter harmful material. The law, which is being watched closely by other countries, comes into effect on December 10 and increases the minimum age to use platforms including TikTok, Instagram, Facebook, Snapchat and X to 16.
