Market outlook: Fourth quarter 2024

25 September 2024 by National Bank Investments

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Small-cap stocks are off to a good start in 2024, with the MSCI World Small Cap Index progressing. However, these stocks are still lagging larger companies, mainly due to the strong performance of big tech and higher interest rates affecting the global economy. PineStone Asset Management Inc., portfolio sub-advisor of the NBI Global Small Cap Fund provides an overview of the last quarter and shares what opportunities lie ahead.

Read the portfolio manager’s comments for this fund included in certain NBI Portfolios and NBI Private Wealth Management profiles.

In our view, based on current trends, 2024 is potentially shaping up to be another positive year for the small cap sector with the MSCI World Small Cap Index holding on to positive year to date performance of 10.8%. This performance from the group is still below that of the large cap MSCI world index, continuing a trend that we have seen play out in the last few years. We believe that the main reasons behind the underperformance of the small cap sector could be due to outsized return from few mega cap technology stocks and a slowdown in the global economy driven by higher interest rates. Economic factors tend to have a greater effect on small cap stock valuations which could lead to outsized returns in the future when the environment improves.

Outlook and Challenges

With the expectation that global central banks are now moving to a more accommodating stance and with interest rates beginning to reduce, we at PineStone believe the current environment may turn quite favourable for the small cap sector in the coming future. Short-term volatility is to be expected as the impact of the lowered rates will not be felt immediately. We believe now is an excellent period to invest in a fund that focuses on high quality, profitable, growing companies such as the ones owned in the NBI Global Small Cap Fund.

Investment Opportunities

We would like to take the opportunity and provide a more detailed profile on Technology One, a holding in the fund. Technology one, “TNE” is a provider of fully integrated business software solutions, specifically for the local government and education end markets.

There are many reasons why we at PineStone believe TNE is a high-quality business. Firstly, TNE has an ideal solution in the market, predicated on the fact that it is a single, fully integrated Software as a Service (SaaS) Enterprise Resource Planning (ERP) solution. This enables clients to have fewer vendors, one user-interface, one technology architecture and integration across all products. Secondly, Technology One has a solution set that is the deepest and most tailored towards their specialty niches, local government and education. Finally, TNE firmly believes in their “Power of One” strategy which is providing clients 1 vendor, 1 code line, 1 experience. This translates to clients not needing to deal with any third-party implementation partners.

The strength of their product offering, and service can be shown within their financial metrics. Being a fully SaaS business today, TNE boasts low customer churn, high margins, high return on invested capital and very consistent levels of revenue growth driven by both new customers and cross selling more product modules to existing clients. Recently, Technology One announced their newest offering, SaaS+ which ultimately removes the risk of implementation delays and incremental costs for the client. PineStone believes SaaS+ will be a key differentiator for Technology One as they are virtually the only ERP provider to offer this service due to their “Power of One” strategy and internally providing the implementation services.

Overall, we at PineStone believe Technology One is poised to continue to grow at healthy levels and ultimately over time enhance margins due to the increased penetration of their new SaaS+ offering.

Companies like Technology One are key components of the NBI Global Small Cap Fund. They are aligned with our long-standing philosophy of investing in high-quality companies that should compound capital over the long-term.

Fund Strategy

We at PineStone believe one can generate superior and sustainable returns by investing in a concentrated, yet diversified portfolio of extremely high-quality companies and holding them for the very long term. This approach is most effective when applied over multiple years, or even decades. Our focus continues to be on identifying what we believe to be high-quality companies with consistent competitive advantages, operating in industries with high barriers to entry, and contributing to durable pricing power.

*As at September 15, 2024

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