
Informed momentum: Winners, Losers, and Emerging Trends in Global Smalls
Travis Prentice, portfolio manager EAM Global Small Companies Fund – December 2024 Quarterly Update
The Big Three Events That Shaped Q4:
There were three main developments in global equity markets in the December quarter. First was the US election. Second was the US Federal Reserve meeting in November. And lastly, were political instability in Europe and fears of recession.
So let’s take each one by one.
First and foremost, we had the US election where President Trump won again. And what that unleashed was a very strong performance in the United States, with companies lever to domestic consumption. The other thing we saw, obviously, were ripple effects of his agenda. Probably most important were tariffs and that had ripple effects across emerging markets and also Europe.
The second was, although we saw very strong performance in November, particularly in the US, the US Federal Reserve played the role of the Grinch in December when they had their meeting and talking about not obviously they cut interest rates, but they really talk down future interest rate cuts. And that really put a kind of a spoil on the US stock market in December. So we saw a pretty significant pullback.
Who Thrived and Who Tanked: Regions and Sectors
The last thing we saw from a country perspective was really political instability and fears of recession in Europe. And so Europe continued its dissent being one of the worst performing regions in global equity markets.
In calendar year 2024, we really saw India being the standout to the upside of very strong performance in India, followed by the US and Canada.
And so there really were some pretty strong divergences in returns by country.
From a sector perspective, it was really financials and information technology and really everything else. Financials and technology were by far the leaders where we saw pretty negative performance across every other sector and industry.
EAM Global Small Companies Fund Performance in Focus
The performance of the fund in the December quarter was pretty strong, both in absolute and in a relative sense. So, in the absolute sense, the December quarter in Australian dollar terms was up a little over 11%, beating the index by 258 basis points.
Similarly, the 2024 was a very strong year for the fund in both absolute terms again and relative terms. The fund was up 29. 69%, to be exact, beating the index by 10.73 percentage points. So, very strong December quarter and very strong calendar year 2024.
Drivers of Outperformance
Our performance was further boosted by our positionings relative to industries during the quarter, particularly in overweight to technology, and also our positioning relative to currency, you know, that was basically due to our exposure to US dollar or more of our companies on a relative weight had exposure to US denominated sales and that helped during the quarter.
That was offset a little bit by our positioning relative to countries, most importantly, are overweight to India, which detracted slightly from returns, but overall a very strong quarter driven by exactly what we want and expect it to be, and that’s informed momentum.
From an attribution perspective in calendar year 2024, our outperformance was driven by the most part to do to inform momentum. That’s the exposure of momentum plus stock selection. So taking one step further into that it was really the holdings in US, India and Korea that contributed most.
That was offset by a little bit of a negative exposure to value, which is kind of our persistent underweight, which actually did well in calendar year 2024.
What’s Next? New Trends for 2025
In terms of new trends that we are seeing the US is still exhibiting very strong momentum, in fact, accelerating a little bit as we enter 2025. On the other side we’re seeing India lose momentum quite substantially, and so we’re seeing our portfolio move to areas of strength and away from weakness. And right now, from a country perspective, the US is the area where we’re seeing the strongest momentum.
Diving Deeper: Sector Opportunities
So from a sector perspective where we’re finding the strongest trends currently as we enter 2025 is really in industrials, technology, and energy.
Industrials
In industrials, what we’re seeing is very strong trends in aerospace and defence. And within aerospace and defence, we’re seeing strong opportunities, strong trends in space exploration, particularly in the United States. So companies we own in the fund include Rocket Labs and Redwire. And we’re certainly seeing a lot more interest in SpaceX relation in the US as Trump has made it one of his goals to send an astronaut to Mars.
New flavours of AI
Further in industrials, obviously we’re seeing continued strength and momentum and everything AI, particularly in infrastructure and construction, you know, building out of data centres, utilities. So, companies like a Sterling Construction in the US has been very strong.
In technology we’re seeing new trends still driven by AI, but different flavours of AI. Whereas before we saw only really momentum in the enablers, so networking, communication, equipment, things of that nature. We’re seeing it broaden out a little bit into more of the harnessers of AI. So more software driven opportunities like Pegasystems in the US.
Having said that, though, we’re still seeing very strong trends in everything that’s levered to the build out of data centres where there be networking or electrical equipment. So that still maintains very strong momentum, but new trend we’re seeing in software.
Energy
The other area of seeing very strong trends currently really new trends is in energy. And particularly within energy companies levered to natural gas, either exploration or services, as we’re seeing more of the market really come to the realization that natural gas will be the near and medium term source for the utility companies to really power the AI workload.
So we’re seeing very strong new trends and companies leverage to either natural gas equipment, or exploration. Companies that we own in the fund leverage to that theme would be DT Midstream and Archrock, both in the United States.
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*The text has been edited for clarity.
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