David Dineen, CFA®, Chief Investment Officer, Global Small Cap
November 5, 2021
Despite evidence that economic activity slowed markedly in the third quarter, October saw strong equity market returns. Global small cap equity markets rose 3.63% in the month as measured by the MSCI Global Small Cap Index. Markets were relieved that slower activity and margin pressures from increased raw material prices, labor costs and supply chain woes did not derail the earnings recovery. Meanwhile, improving COVID-19 numbers buoyed sentiment.
Coming out of the soft growth in the third quarter, we see opportunities in the automotive supply chain, as new car sales have borne the brunt of the production curtailment caused by the global semi-conductor shortage. This positive stance stems from seeing new car sales peak at roughly 18.5 million units on an annualized basis in April and then decline by a third to a near recessionary level of 12 million in September, a level very close to the COVID-19 shut-down trough of 11.4 million. As the global semiconductor shortage begins to abate, car makers will ramp up production schedules to normalize inventories. Building pent-up demand, low interest rates and improving labor markets should underpin a robust recovery in 2022.
We are also constructive toward copper stocks, seeing the metal as both a near-term beneficiary of economic recovery and a long-term beneficiary for green energy technologies. Although copper prices are up sharply, there is limited new supply coming and existing production is seeing shortfalls in Chile, the largest producer. Consequently, inventories are at their lowest levels since 1974. While copper typically benefits from a global recovery, we believe it is underappreciated for its role as the “picks and shovels” play for broader decarbonization technologies, given the increasing intensity of its usage in electric vehicles and critical role connecting offshore wind and solar projects to the distribution grid.
Although we remain constructive on the outlook for global small cap equities, we acknowledge the elevated risks from COVID-19 flare-ups, supply chain bottlenecks and policy mistakes. We believe that the recent slowdown provides an opportunity for the economy to reaccelerate as labor markets continue their slow improvement and stifled demand anchors consumption, which is buttressed by high savings rates and the wealth effect from elevated housing and strong equity market returns. As the market narrative shifts from inflation to recognition of an improving growth scenario in 2022, we believe this should provide a supportive backdrop for equities. We will remain steadfast in our approach to identify attractive companies with improving earnings dynamics, attractive valuations and healthy balance sheets.
The views expressed are those of Spouting Rock Asset Management as of November 1, 2021 and are not intended as investment advice or recommendation. For informational purposes only. Investments are subject to market risk, including the loss of principal. Past performance does not guarantee future results. There can be no assurances that any of the trends described will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of future events or results. Investors cannot invest directly in an index.