International Shares, Investments

Small caps set for comeback

Small-cap stocks Quality companies Inflation Interest rates

Small-cap stocks are set to benefit from easing economic conditions, but investors should still opt for quality companies with resilient earnings.

Small-cap stocks are likely to rebound in the coming months in the Australian and international share markets as they regain ground lost to large-cap stocks and a continued focus on quality companies will dampen volatility shocks, according to two investment firms.

Prime Value Asset Management portfolio manager Richard Ivers said the reason for the optimism around small-cap stocks was driven by the slowing rate of inflation and central banks indicating interest rate rises were coming to an end.

“In small-cap stocks there is well-placed optimism about the number of quality companies which are attractively valued. Many of these were oversold as the small-cap sector lagged large-cap stocks over the previous two years, creating excellent buying opportunities and an exceptional opportunity for long-term investment returns in quality small-cap companies,” Ivers said.

“Earnings resilience is an attractive characteristic over the longer term in small-cap stocks as we don’t know what surprises may be in store over 2024 and beyond.”

Looking offshore, American Century Investments senior portfolio manager Trevor Gurwich and senior client portfolio manager Jim Shore said the case for investing in global small caps remained strong and macroeconomic events overshadowed the underlying value of many shares.

“Global small-cap stocks have borne the brunt of worries about inflation, rising interest rates and slowing economic growth over the last three years,” Gurwich and Shore said.

“Despite somewhat resilient corporate earnings, the trend continued in 2023 with small caps underperforming large caps by a wide margin, particularly in the US. However, this period of relative weakness has been an exception compared to a record of small-cap outperformance since 2001.

“As we open 2024, indications that inflation is easing have again raised hopes for a sustained pause in global central bank rate hikes. We believe this could produce a more favourable backdrop for global small caps and allow investors to refocus on earnings growth as the key driver of stock prices.”

Ivers said despite the positive outlook, investors should still exercise discretion in picking small-cap stocks.

“The smaller end of the market can be volatile, but this can be tamed somewhat by focusing on the more quality companies which demonstrate resilient earnings,” he added.

“We’ve always felt strongly that managing volatility successfully starts with what you are buying – if you buy well and focus on quality, there is a good chance you will deliver returns with lower risk over the longer term.”


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