Ausbiz – Can small caps outperform in a rising rate environment?

24 Mar 2022

It’s the question small cap fundies are asking themselves as it becomes clear that the Federal hawks have their talons out. Franklin Templeton did the research and discovered many investors don’t know that small caps and rising interest rates have enjoyed a historically harmonious relationship. The Russell 2000 has posted returns above its historical averages in one-year periods when the 10-year Treasury rose. Dean Fergie from Cyan Investment Management said if rates are rising due to a hot environment then it should be good for small caps. Typically people don’t invest in smalls for an income flow so those that have may rethink as rates rise but Dean thinks overall it will be positive. When it comes to macro plays the weakness in consumer confidence will flow through to consumer discretionary. Especially as consumers deploy their cash into hospitality and travel and all opens up, the consumer goods could be hit hard. City Chic (CCX) has a proven product and its not a bad place to look for a longer term operator. The real pick for Dean though is Quickstep (QHL) which is seeing an uptick for its products.