Outlook for small-caps amid COVID-19 crisis

The COVID-19 storm has ravaged big corporations across the world and here in South Africa is no different, but is this trend seen across the board with the small caps sector as well? Anthony Clark, Independent Analyst at Small Talk Daily Research joins CNBC Africa for more.

Thu, 30 Jul 2020 11:22:40 GMT

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AI Generated Summary

The small-cap sector in South Africa has been heavily impacted by the COVID-19 crisis, with year-to-date performance showing significant declines compared to larger companies with offshore earnings.
Delistings have been prevalent in the small to mid-cap space, driven by private equity transactions and a lack of interest from institutional and private investors.
Despite the challenges, there are pockets of opportunity in the small-cap universe, with companies demonstrating strong fundamentals attracting interest from private equity investors and experiencing share price appreciation.

The small-cap sector in South Africa has been facing significant challenges in the midst of the COVID-19 crisis, with companies grappling with economic uncertainty and a weak domestic market. Anthony Clark, an Independent Analyst at Small Talk Daily Research, shed light on the current state of small to mid-cap stocks in a recent interview with CNBC Africa. As Clark highlighted, the small-cap market has seen a decline of about 22%, while the mid-cap market has fared even worse at around 25% year-to-date. In comparison, larger companies with offshore earnings have been more resilient amidst the crisis. The South African economy, plagued by political and economic instability, has further exacerbated the challenges faced by domestic small-cap companies. The unfavorable environment has led to a significant number of delistings, with institutional investors and private clients showing reluctance to invest in small to mid-cap stocks. Private equity transactions have driven a wave of delistings, with the number of companies on the exchange dropping below 350. However, despite the challenges, there are pockets of opportunity in the small-cap universe. Clark pointed out that companies with strong fundamentals and growth prospects have attracted interest from private equity investors, leading to bidding frenzies and significant share price appreciation. Special situations, such as buyouts and investment opportunities in undervalued stocks, are expected to drive activity in the small-cap space in the coming months. While there are opportunities for growth in certain sectors, Clark cautioned against investing in consumer-focused stocks, particularly those directly linked to discretionary spending. Companies in the education sector, for instance, have seen significant declines in share prices due to concerns about affordability and growth prospects. Clark recommended a cautious approach towards consumer stocks and advised investors to look for opportunities in the industrial sector and other areas of excellence. Companies like Bolemetcalf, operating in the packaging sector, have demonstrated resilience and strong earnings growth amidst challenging market conditions. Overall, navigating the small-cap landscape in South Africa requires a careful balance of risk and opportunity, with a focus on identifying companies with strong fundamentals and growth potential.