This August reporting season will be another volatile one, with share price reactions likely to be sharp and immediate, and consistent with recent reporting seasons, according to Phillip Li, co-portfolio manager of the SGH Smaller Companies Fund.
“Despite the RBA entering a rate-cutting cycle this year, the recent hold on rates has not helped consumer sentiment. Consumers are still cautious, and their depleted savings is not encouraging.
“Among the consumer discretionary companies, promotional activity remains elevated to support volumes and retain revenue levels. These companies are still facing cost pressures, particularly around wages and rents.
“In addition, for those businesses exposed to tariffs, the market will be watching closely to see where those costs will be absorbed along the supply chain, and whether management can offset them through pricing, cost discipline, or new revenue streams,” he says.
Mr Li says that structurally he remains positive on gold and views the current pullback as a timely opportunity to increase exposure to precious metals.
“The underperformance of Australian gold miners, down 12 per cent relative to the VanEck Gold Miners ETF (GDX), was largely driven by the well-flagged GDX index transition, which takes effect on September 19. This change, from the NYSE Arca Gold Miners Index to the MarketVector Global Gold Miners Index, will result in the exclusion of most ASX-listed producers.
“The resulting capital outflows have created attractive entry points, and we are starting to rotate into compelling mid-cap opportunities. With the gold price holding up and production growth in focus, we see upside in a few select names with a track record of strong operational performance and good capital discipline, including Emerald Resources (ASX: EMR) and Vault Minerals (ASX: VAU),” he says.
While headline numbers will draw attention, Mr Li says it’s the outlook commentary that will drive sentiment, especially around margin resilience and demand into FY26. He says the outlook for Australian small caps is mixed, however investors need to think long term and also use market volatility to buy into areas at better valuations.
“Periods of heightened volatility can be uncomfortable, but we believe it’s precisely when long-term investors should stay the course. Historically, some of the best days in the market tend to occur during or shortly after the most volatile periods, and missing just a handful of those days can meaningfully erode long-term returns.
“For small caps investors like ourselves, we have a large universe of companies to invest in and need to really look for compelling areas within this space where we see value. Rather than trying to time the market, our preference is to be prepared. We keep an eye on companies that we would like to add to the portfolio, and use volatility as a time to buy into these opportunities at more compelling valuations.
“Ultimately in small caps, backing quality management teams is key. A competent, aligned leadership team can navigate volatility far better than macro forecasts can. That’s the lens we use to assess opportunity, and it hasn’t changed,” says Mr Li.
This month Lonsec upgraded the SGH Small Companies Fund to ‘Recommended’ following its latest review. It cited several key factors that enhance the Fund’s long-term investment proposition, including the restructure of the investment team with Rory Hunter stepping into the role of co-portfolio manager with Phillip Li, and the consistent application of the Fund’s quality-focused investment process and philosophy. The fund has returned 25.29 per cent over the 12 months to 30 June 2025, outperforming the S&P/ASX Small Ordinaries index by 13.03 per cent.
