K2 CIO Investment Note October 2021

By David Poppenbeek October 2021

Australia is moving into an environment where the majority of the economic pistons will be firing in unison which will be highly advantageous for smaller capitalised companies.

At present Australia’s Household Savings Rate (HSR) is twice as high as the average rate over the past 30 years. An elevated HSR typically co-exists with low levels of confidence and adverse business trading conditions. It is our expectation that Australia’s HSR will decline below 5% throughout 2022 and beyond, driving economic growth expectations to around 3%pa. To our mind, the Reserve Bank of Australia (RBA) may be too conservative with its current GDP growth projections.

Smaller capitalised companies tend to be more leveraged to economic cycles. Typically, when trading conditions are robust, confidence is high and growth opportunities are embraced by management teams. Conversely, when economic activity is stagnant, business leaders lose confidence and growth pursuits are quickly stifled. As a result, we believe that economic leading indicators are an insightful tool for gauging the mood of business leaders, particularly those within smaller companies. Ultimately, when leading economic indicators are positive and stable, the share prices of smaller companies respond positively. It is our expectation that 2022 will be a year of more economic stability and we anticipate that leading indicators in Australia will stay stronger for longer. This backdrop would be conducive to a sustained period of attractive total returns from smaller companies.

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