Recent weeks have seen a growing interest in ASX small-cap shares, driven by a notable correction in the broader market. As the new financial year commenced, the S&P/ASX Small Ordinaries Index (ASX: XSO) surged by 4.6%, peaking at 3,087 points on July 17. In contrast, the large-cap S&P/ASX 200 Index (ASX: XJO) showed a more modest gain of just over 4%, reaching an all-time high of over 8,000 points shortly after.
This divergence has raised concerns about a potential rotation from large-cap shares to smaller market segments, suggesting a possible slowdown in the broader market. However, both indexes for large and small-cap shares have experienced a decline of approximately 2% over the past week.
Consideration of ASX Small-Cap Shares
The potential for interest rate cuts has become a focal point for investors looking at small-cap stocks. Speculation regarding the US Federal Reserve possibly reducing interest rates as early as September is prompting a shift in investment strategies. This environment is seen as favorable for smaller companies, which may benefit from reduced borrowing costs and improved market conditions.
According to market insights, the shift from large-cap to small-cap shares is partly driven by expectations of controlled inflation and anticipated rate cuts. There is a growing belief that as inflation pressures ease and rates potentially decrease, smaller-cap stocks might offer greater growth opportunities.
Investment Insights
While global trends suggest a rotation toward small caps, these stocks have lagged behind large caps in recent weeks. Despite this, some investment experts emphasize the potential of small-cap stocks to recover before the broader economy reaches its low point.
Investment managers advise that small-cap stocks can often lead market recoveries. For example, small caps typically begin to perform well six to nine months before the economy hits its trough. Thus, investors are encouraged to consider small-cap equities before the broader economic recovery becomes evident.
Identifying Opportunities
Finding promising small-cap stocks involves looking for companies with low debt and strong growth potential, even in environments with rising interest rates. High-quality businesses that are likely to become leaders in their sectors are seen as particularly valuable.
In addition, there is interest in small-cap resource stocks, which, despite their recent poor performance, might offer attractive opportunities as commodity prices recover. The focus is on identifying small-cap companies with promising growth prospects and robust market positions.
Potential Small-Cap Stocks
Some small-cap shares currently attracting attention include those in sectors like mining and biotechnology. For instance, copper miner Aeris Resources Ltd (ASX: AIS) is noted for its strong copper mining exposure and growth prospects driven by high-grade ore sources. Similarly, regenerative medicine company AVITA Medical Inc (ASX: AVH) is recognized for its significant growth potential.
The evolving economic landscape and shifts in investor sentiment suggest that ASX small-cap shares could be on the verge of a notable comeback. However, small caps are known for their volatility and sensitivity to market movements. Investors are advised to conduct thorough due diligence and carefully assess the risks and opportunities before making any investment decisions.