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Small caps outdo larger shares

Australia’s small-cap shares have raced ahead of the largest shares in a tale of two markets, according to Lonsec Research.

The research house said small caps have continued their run of outperformance, returning 4.1 per cent over the three months to May and 25.4 per cent for the 12 months to May 2018.

On the other hand, Australia’s largest shares have lagged, with structural headwinds, regulatory risks and declining public trust dragging down the top of the market.

Small-cap share valuations have been propelled by factors such as technological disruption, Chinese demand and the commodity rally, providing significant opportunities for investors.

Previously ‘beaten-up’ mining services firms such as Monadelphous and NRW Holdings, as well as consumer staples such as organic infant formula producer Bellamy’s, have been the beneficiaries.

The larger share market, on the other hand, has been dragged down by recent poor performance by the banks, as well as troubled stocks such as Telstra, Brambles and AMP.

The S&P/ASX 20, which comprises Australia’s top 20 biggest stocks by market cap, has underperformed the broader market, returning 6.9 per cent over for the year ended May 2018 compared to 9.6 per cent for the ASX 200.

“The sheer size of these stocks has had a big impact on the market, with the five worst-performing stocks within the top 20 wiping $51.6 billion from the S&P/ASX 200 Index over the past year,” Lonsec said.

Telstra was the biggest loser, posting returns of -36.4 per cent, followed by Commonwealth Bank of Australia at -13 per cent.

In terms of Australia’s major banks, Lonsec currently views valuation support at fair value while earnings might exhibit low growth at best due to weaker consumer sentiment and increased regulatory risk on the back of the banking royal commission.

“However, despite the recent pain, it is possible the worst may be over for now and investors will be looking for long-term value opportunities among the big four,” the research house said.

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