New Dawn for Small Caps

Wealth Management Read time 3mins
22 Jul 2023
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Now Reading: 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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Tim Rocks
Chief Investment Officer

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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.eandp.com.au. Please let us know if you would like to receive a hard copy free of charge.