Australia’s small cap shares have continued their extraordinary run of outperformance, returning 4.1 per cent over the three months to May and 25.4 per cent over the past year, according to Lonsec Research.
In what the research house described as a “tale of two markets,” Australia’s largest shares have proved the laggards, with structural headwinds, regulatory risks, and declining public trust dragging the top of the market down.
In contrast, small-cap shares have continued to present significant opportunities through 2018, with themes such as technological disruption, Chinese demand, and the commodity rally all driving valuations higher, Lonsec said.
The beneficiaries have been previously “beaten-up” mining services stalwarts such as Monadelphous and NRW Holdings, as well as consumer staple market darlings like organic infant formula producer Bellamy’s, it said.
The S&P/ASX 20, which encompasses Australia’s top 20 biggest stocks by market cap, is underperforming the broader market, returning 6.9 per cent over the past year, compared to 9.6 per cent for the ASX 200, Lonsec said.
In particular, recent poor performance from the banks, as well as problem stocks like Telstra, Brambles, and AMP have all been a drag.
“The sheer size of these stocks has had a big impact on the market, with the five worst performing stocks within the top 20 wiping $51.6 billion from the S&P/ASX 200 Index over the past year,” Lonsec said.
In terms of Australia’s major banks, Lonsec said it currently views valuation support at “fair value”, while earnings are likely to exhibit low growth at best, due to weaker consumer sentiment and the increased regulatory risk in the wake of the Royal Commission into Financial Services.
“However, despite the recent pain, it is possible the worst may be over for now, and investors will be looking for long-term value opportunities among the big four,” the research house said.
