Australian small-cap stocks are experiencing a resurgence after several years of underperformance. Melbourne-based investment manager LSN Capital Partners, whose Emerging Companies Fund had its strongest month in August, is now up 21.4 per cent in the three months through September. LSN Capital Partners is an investment manager, based in Melbourne, offering tailored portfolios and investment strategies. Their Emerging Companies Fund focuses on identifying and investing in high-growth potential small-cap companies.
The S&P/ASX Small Ordinaries Index is up 22.5 per cent this year, marking its best performance since the global financial crisis in 2009. This rally, fuelled by a 14.3 per cent gain in the September quarter, significantly outpaced the S&P/ASX 200 Index’s 3.6 per cent advance. Key contributors to the Small Ords rally included companies such as DroneShield, Eagers Automotive, Zip Co, Vault Minerals, and Capricorn Metals.
Fund managers are increasingly optimistic about the continued outperformance of small caps. There are signs that the Australian economy is gaining momentum, which benefits small caps due to their higher revenue exposure to cyclical sectors like consumer discretionary and real estate. Goldman Sachs described the August reporting season as the best for small caps in over 25 years.
Analysts are also betting a recovery in the Australian dollar will further support domestic small caps. UBS forecasts the Australian dollar will push through US68¢ by the end of this year and noted a break above US70¢ is within reach over the next six months. Bell Potter said it is increasingly favouring mid and small-cap stocks in its Australian Equity Core Portfolio because that’s where it sees the “most compelling stories”.
