The latest reporting season showed some small cap companies are under pressure – including retailers – while others have a rosier outlook, such as gold miners, according to Phillip Hudak and Matt Griffin, co-portfolio managers of the Maple-Brown Abbott Australian Small Companies fund.

They said retailers’ margins might continue to shrink in 2025, even though retail sales are holding up in Australia.  

“Margins are under pressure and while retail sales are holding up, retailers are discounting prices to attract consumers who are reluctant to spend as cost-of-living pressures mount, reducing their margins. We have seen this is the case for listed retailers such as Myers and Adairs in the February reporting season,” Mr Hudak said.

“We’ve also seen more small caps downgrade earnings and earning per share (EPS) forecasts than upgrades, so there is some pressure being felt across the share market more broadly,” he said.

Looking ahead into 2025, the banks, which comprise nearly a quarter of the Australian equity market, are unlikely to provide substantial market support in 2025 due to limited earnings growth and full valuations.

“Interest rate cuts generally aren’t good for bank earnings, and with a mixed set of results from earnings season, this could be a big headwind for the ASX100 over the coming year, given how large the banks are as a percentage of the Australian index. Couple this with insurers who are very well owned by large cap managers, in an environment where the premium rate cycle is turning negative, this could support our thesis of small caps catching up some of the underperformance over recent years,” Mr Griffin said.

In addition, merger and acquisitions (M&A) activity is boosting some small caps, including Domain and Mayne Pharma.  Maple-Brown Abbott expects more M&A activity in 2025, with the lower Australian dollar making local assets cheaper for offshore buyers, and cash heavy private equity groups circling local companies.

“Private equity money is chasing undervalued stocks in the small cap space, and so we are seeing increasing M&A activity,” said Mr Hudak.

“In recent times, Insignia shares have rallied amid an intensifying bidding war between private equity firms CC Capital, Bain Capital and Brookfield and we have also seen takeover bid for Domain, which was a top performer this reporting season, from US giant CoStar,” Mr Hudak said.

“Another example is private equity-backed US pharmaceutical giant Cosette making a takeover bid for Mayne Pharma Group, and we believe that we will see a greater level of corporate activity going forward in 2025,” he said.

Greater M&A activity could also support the gold sector into 2025, with higher gold prices triggering greater activity.

In terms of other sectors, the first half of the 2025 calendar year is expected to be mixed given the upcoming Federal election, which must be held by May 2025.

“We expect cost-of-living measures and fiscal spending to continue which should be supportive for the aged care and childcare sectors,” Mr Hudak said.

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