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New Dawn for Small Caps
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New Dawn for Small Caps
Improving confidence in the global outlook has seen smaller companies start to outperform larger companies in the US and Australia.
There remains a remarkable divergence between the valuations of small and large caps globally. US small caps are trading at a 25% discount to historical average valuations compared with the broader S&P 500, trading at a 10% premium.
Many risks are still facing the US market, but this valuation cushion provides some protection for small caps in the short term and points to the potential for strong gains once there is more clarity on the outlook.
The argument for investing now is to ensure that your portfolio is well-positioned for improving economic conditions when they occur. In each previous recession, small caps performed strongly during the recovery phase. This is partly due to the small cap part of the market having a different sector composition. Compared with US large caps, the smaller cap indices have much less exposure to tech and more exposure to cyclically-sensitive sectors such as financials, industrials and energy.
There is also an opportunity in Australian small caps. Australian small caps significantly underperformed last year. Small companies were particularly hit in 2022 when the RBA began it’s tightening campaign and liquidity conditions tightened. Valuations are also attractive and we expect Australian small companies to outperform once the economy begins to pick up.
Investors should consider building some exposure to these smaller companies in the US in Australia. This is best done through dedicated small cap managers.
To find out more, please contact your adviser.
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This information was prepared by Evans and Partners Pty Ltd (ABN 85 125 338 785, AFSL 318075) (“Evans and Partners”). Evans and Partners is a wholly owned subsidiary of E&P Financial Group Limited (ABN 54 609 913 457) (E&P Financial Group).
The information may contain general advice or is factual information and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Where a particular financial product has been referred to, you should obtain a copy of the relevant product disclosure statement or offer document before making any decision in relation to the financial product. Past performance is not a reliable indicator of future performance.
The information may contain statements, opinions, projections, forecasts and other material (forward looking statements), based on various assumptions. Those assumptions may or may not prove to be correct. E&P, its related entities, officers, employees, agents, advisors nor any other person make any representation as to the accuracy or likelihood of fulfilment of the forward-looking statements or any of the assumptions upon which they are based. While the information provided is believed to be accurate E&P takes no responsibility in reliance upon this information.
The Financial Services Guide of Evans and Partners contains important information about the services we offer, how we and our associates are paid, and any potential conflicts of interest that we may have. A copy of the Financial Services Guide can be found at www.evansandpartners.com.au. Please let us know if you would like to receive a hard copy free of charge.
The Financial Services Guide of Evans and Partners contains important information about the services we offer, how we and our associates are paid, and any potential conflicts of interest that we may have. A copy of the Financial Services Guide can be found at www.evansandpartners.com.au. Please let us know if you would like to receive a hard copy free of charge.
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