It was undoubtedly another strong quarter for the equity markets —driven still in part by the post-pandemic economic recovery but with some return to a focus on fundamentals, according to Small Cap Quality Value portfolio manager and senior analyst Julie Kutasov.
Kutasov believes the flattening of the yield curve and changing interest rate and inflation expectations that surfaced during this quarter signal a return to a steadier state after the hyper pace of post-pandemic recovery. “The backdrop of significant inflation and pressures on input costs of raw materials and tight labor supply tends to favor high-quality companies that are generally able to easily pass this cost on to their customers in the form of higher prices.”
However, the Russell 2000 benchmark retained some of the previous quarter’s affection for names with lower earnings and quality, higher financial leverage, and higher volatility. According to Kutasov, “companies that exhibit strong earnings stability hold up much better during periods of economic distress but consequently tend to lag the market during periods of robust recovery.”
Key Contributors and Detractors in Small Cap Quality Value Q2 2021
To learn more about the top 5 contributors and detractors in KAR’s Small Cap Quality Value strategy for Q2 2021 listen to the podcast above.
Second Half of 2021 — Where are the Pockets of Opportunity?
Kutasov believes one can discuss the outlook today without touching on the interest rate environment and inflation expectations. As mentioned before, KAR’s small cap quality value portfolio stays away from capital-intensive and direct commodity exposures, and the leading market positioning of its companies gives them solid pricing power to survive inflation.
“Needless to say, that in this market with its current highs, finding attractive valuations is more challenging, but we’re able to identify pockets of opportunity —companies we believe are positioned to benefit from structural shifts occurring in their industries. And the pandemic has accelerated a number of sectors, most important of which is digital transformation. Within this environment, we will continue to do what we have always done — look for differentiated, protectable businesses.”
This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.