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How investors can find opportunities in 2020’s structural market shifts

“Investors can take advantage of 2020’s structural market changes by looking to invest in companies with smaller market capitalisations” says Yarra Capital Management microcap portfolio manager Joel Fleming.
“Investors can take advantage of 2020’s structural market changes by looking to invest in companies with smaller market capitalisations” says Yarra Capital Management microcap portfolio manager Joel Fleming. Mr Fleming, who began his professional investing career in 2000, said microcap companies offer investors the chance to gain exposure to niche trends and industries not available in the top end of the index. “If you think about the top 100, it’s the banks, it’s Wesfarmers and Woolworths, Telstra, CSL and the big miners – it’s quite consolidated and its industry exposures are quite narrow,” he said. “The further down you go on the market cap spectrum you can find access literally to almost any kind of business tapped into the economy, and that’s really exciting.” The trick, Mr Fleming said, is to identify which ones will grow to become a larger part of the overall economy.
“We try to break the portfolio into parts, and the company we love to find most is that structural growth story that’s benefitting from structural change in the market,” he said.
Mr Fleming cited radiology information and visualisation technology provider Pro Medicus (ASX: PME) as an example. “We saw MRI moving from analogue – Fuji Film, basically – to digital scans and computers needing to do that. That’s a case example of the whole digitisation theme that has been sped up by COVID,” he said. “We’re looking for those structural stories where the market’s shifted and there are some companies that are well-placed to grow strongly as a result of that.”

Two companies to watch

Mr Fleming pointed to two microcap stocks which he believes fit this mould of structural growth: road transport telematics company Eroad (ASX: ERD), and charter aviation business Alliance Aviation (ASX: AQZ). Eroad is a dual-listed business operating in Australia and New Zealand and which helps logistics companies improve their safety standards, productivity, and asset management. And it helps logistics businesses to do all of this at a time when regulators are looking to strengthen compliance and safety requirements and demand for goods to be transported is growing, Mr Fleming said. “It’s not the sexiest business in the world, but it’s technology based, it has a subscription element which is really powerful,” Mr Fleming said. As for Alliance Aviation, Mr Fleming acknowledged it “doesn’t sound right” to be investing in air travel at the tail-end of a pandemic which effectively grounded the world’s aviation industry.
But Australia is a big country, and many Australians need to travel for work – particularly those working in the resources industry.
“[Those workers] used to rely on the domestic aviation network. Given that that almost came to a complete halt, and Virgin is a much more slimline business these days, we see a real opportunity for Alliance Aviation to take a significant part of that market opportunity,” Mr Fleming said. “They’re in the business, they’ve supported the mining industry for a very long time and we just see a big structural shift in the market in terms of some of those changes in that domestic network.”   Mr Fleming will be joining us for our next instalment of ‘The Insider – Meet the Fund Manager’ on 29th January, a FREE webcast series which gives you direct access to prominent fund managers who share their “Insider” views on their favourite stocks that they think have the greatest upside. Book here.  This session is live and interactive and includes a live Q&A. Spots are limited, so please book into this session as soon as possible.   Any advice contained in the presentation is general only and does not consider your objectives, financial situation or needs, and you should consider whether it’s appropriate for you.   Sources:    

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