Australian small-cap stocks have faced a challenging year on the ASX, with the Small Ordinaries Index dropping 13 per cent, significantly underperforming the S&P/ASX 100’s nearly 5 per cent climb. This downturn stemmed from surging oil prices and the Reserve Bank of Australia’s aggressive interest rate cycle. However, a recent softer inflation report, indicating a faster cooling of the economy, has significantly altered expectations for further rate rises. This shift has generated renewed excitement among small-cap fund managers, who now anticipate a potential recovery for the sector.
Small companies are particularly sensitive to interest rate fluctuations due to higher debt levels and greater exposure to consumer downturns. Conversely, they often perform strongly when markets anticipate a peak in the rate cycle. VanEck senior portfolio manager Cameron McCormack noted that “Australian small caps have been crushed,” but believes they “could be among the biggest beneficiaries” if the cash rate peaks. Following the June quarter Consumer Price Index data falling below forecasts, bond markets notably reduced bets on further RBA rate hikes. McCormack advised against broad Small Ordinaries Index exposure, instead favouring companies with recurring revenues and disciplined capital allocation like Tasmea and engineering service provider SRG Global.
Phillip Li, portfolio manager of SG Hiscock’s Australian Small Companies Fund, acknowledged federal government capital gains tax discount reforms also impacted small caps, yet sees emerging opportunities. Li’s top picks include rare earths miner Viridis Mining and Minerals and Navigator Global Investments, a $1.2 billion listed investment business. Navigator Global Investments operates as the ASX’s only pure-play global alternative asset manager, a sector often benefiting from volatility. Bell Asset Management’s Tim Johnston highlighted the small-cap sector trading at a 15 per cent discount to its 10-year average, presenting a historically good entry point. He favours insurance broker AUB Group, despite AI concerns, believing its relationship-driven nature and investments mitigate the threat.
