A local funds management firm is expecting 2025 to be a positive year for the Australian small-cap sector, citing several drivers for this optimism, including domestic interest rate policy and geopolitical factors.
On the first point, Maple-Brown Abbott small companies co-portfolio manager Phillip Hudak noted the sector will benefit from the more conservative approach the Reserve Bank of Australia (RBA) has adopted toward interest rates in an effort to combat the persistence of the current higher inflation levels in comparison to central banks overseas.
“This compares to the US, which has already cut interest rates by 1 per cent in 2024, with the US Federal Reserve flagging at the most recent Federal Open Market Committee meeting that the trajectory of interest rate cuts into 2025 is expected to slow with only an additional 0.5 per cent reduction expected by year end,” Hudak observed.
“This set-up is expected to be supportive and renew investor interest for Australian small caps. US equity markets have seen the smaller end start to outperform the larger end in the second half of 2024 as the US Federal Reserve flagged and subsequently reduced interest rates, which is a precedent for what may happen domestically in 2025.”
With regard to global geopolitical elements, he based his prediction on the expected performance of two shares held in the Maple-Brown Abbott Australian Small Companies Fund in response to a post-COVID trend.
“A key trend post COVID has been companies seeking greater supply-chain security via on/nearshoring. In addition, we are seeing heightened geopolitical tension and deglobalisation, with increasing global defence spending being a structural growth thematic which we expect to escalate under the next Trump presidency,” he said.
“Both Codan Limited (CDA) and Austal (ASB) are positively exposed to this theme via expansion of communication services for military and US shipbuilding, respectively.”
Further, he pointed out the anticipated weakening in the Australian dollar, improved earnings outlook and more attractive valuations will attract overseas merger and acquisition interest in local small-cap companies that will also boost their worth.
“In summary, we have been underwhelmed with the performance of the Australian small-caps market relative to their larger counterpart given the number of tailwinds as risk appetite returns to the space after a challenging few years,” he explained.
“We believe 2025 has all the hallmarks of being ‘the year of the Australian small caps’.”
The manager defines small-cap shares as those, which at the time they are first invested, are not included in the S&P/ASX 100 Index and have a minimum market capitalisation of $100 million.
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