What the ASX 200 doesn’t tell you: gold, uranium small caps ripping

Maybe I went a bit overboard…

Yesterday I may have been a bit downbeat on our local economy amid its productivity crisis and the poor performance of the ASX 200.

But just because the top end of the ASX has flatlined over the last two months doesn’t mean we’re in a barren wasteland for winners.

Let me tell you more…

You see, hidden beneath the surface, our small caps continue to re-take previous valuations that we haven’t seen for roughly three years.

I’ll paint you a picture before we dive into recent good news about our local small caps.

(In spite of the RBA and Canberra’s hijinks)

I draw your attention to the performance of Japan and Germany’s stock markets which an astute reader pointed out also have big productivity problems.

Source: TradingView

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Over the last five years, the ASX 200 has managed a respectable ~52% gain. But here’s where it gets interesting – and slightly embarrassing for us Aussies.

The German DAX 40 has surged ~87%, while Japan’s Nikkei 225 has absolutely screamed ahead with a ~94% return.

Now, before you start packing your bags for Tokyo or Frankfurt, let’s talk about why this comparison is both frustrating and slightly unfair.

The Demographic Productivity Paradox

Germany and Japan both face what economists politely call “demographic challenges” – which is a fancy way of saying their populations are aging quickly.

Japan’s working-age population peaked in the early 1990s at 70% and has since plummeted to just above 59%. Germany faces similar headwinds with shrinking birth rates and an increasingly elderly population.

Yet somehow, despite these productivity-crushing demographics, their markets have absolutely smashed ours.

Japan’s challenge is particularly stark – they’re dealing with the world’s most rapidly aging society, where 28% of the population is over 65.

Their labour force is shrinking so fast they’re literally running out of people to work. And yet, the Nikkei has nearly doubled our performance.

Germany’s story is similar. They’re grappling with the same low fertility rates and aging workforce that should, in theory, be dragging down their economic growth and market performance.

Australia’s ASX 200 on the other hand, is suffering from domestic policy friendly fire, despite being dealt a good draw.

But from malaise comes opportunity…

Aussie market lags, but what’s beneath
the surface?

Here’s the uncomfortable truth: while Germany and Japan have legitimate demographic excuses for productivity crises, we’ve somehow managed to create our own entirely artificial one.

We’ve got a young-ish, growing population, abundant natural resources, and we’re still managing to underperform markets dealing with genuine structural headwinds.

It’s like losing a footrace to someone running with their shoelaces tied together.

But here’s the thing – and this is where today’s story gets interesting – just because the overall index has been a laggard doesn’t mean there aren’t some major green shoots hiding in plain sight on the ASX.

Here’s two stocks in two different sectors of ASX small cap land that I’m watching right now.

Gold: Speculation meets hedge

This should be no surprise.

With our long history of gold mining, small cap gold companies are genuinely taking off after a period of dormancy when the market was mostly interested in the big goldies.

I’ve seen companies like now +$1BN capped Black Cat Syndicate [ASX:BC8] start to really build momentum.

BC8 tacked on +200% in the last 12 months as it improves its output and operational performance.

The explorers are moving hard too now.

It’s a potent combination of hedge meets speculation that the market is obsessed with right now when it comes to gold.

Uranium companies re-awaken after a nap

There’s a potential giant run forming in commodities.

The uranium space has finally stirred from its extended slumber.

After languishing for months, uranium stocks are catching investors’ attention again.

Spot prices are climbing back toward US$83 per pound.

Bannerman Energy (ASX: BMN) exemplifies this revival perfectly.

The company raised $85 million in July. Its war chest now sits at ~$140 million.

Bannerman is quickly advancing its Etango project in Namibia towards a Final Investment Decision.

And we know what generally happens to miners in hot commodities when it starts construction…

The uranium thesis remains really compelling to me.

Global nuclear capacity is expanding. The U.S. is building strategic reserves. Geopolitical supply concerns are mounting.

India wants 100GW of nuclear capacity by 2047. America is targeting 400GW by 2050. That’s quadruple current levels.

And a large part of the demand projections come from… AI data centres.

Watch this space.

Rounding things off here…

Around the world, the cleavage between economies and markets appears to be getting stronger.

Countries like Japan and Germany however, still managed to beat out the ASX despite having at least some demographic-based productivity problems

This is because they have legacy world class businesses (SAP, Toyota etc) that perform based on global growth, which trumps even the most restrictive domestic policies.

So as much of a drag that the Australian economy is right now, that has made the ASX 200’s underperformance a useful smokescreen.

There are hot pockets of stellar returns out there – as we see in gold and uranium on the ASX, away from the top end index.

When an entire market becomes overlooked because the headline index underperforms, whole sectors and individual quality companies can get swept up in the pessimism.

However, this is also when some of the real gems can be found… because others aren’t looking.

The key is focusing on companies that can grow despite, rather than because of, our domestic policy environment.

Companies with international exposure for example, genuine competitive advantages, and management teams that understand how to develop quality projects.

So the hunt continues…

And next week I’ll share a bit more on some of the few remaining “cool pockets” of ASX small-cap land where I am actively looking for the next winner.