Don’t underestimate Aussie small caps, says Datt Capital

The chief investment officer of Melbourne-based fund manager, Datt Capital, has warned investors to not undervalue Australian small caps in favour of the US sector, with opportunities yet to be discovered.

Emanuel Datt said there can be “distinct advantages” for investors seeking value and growth in the “under-researched” Australian small cap sector, which is in stark contrast to the more mature and robust US small caps market. This is indicated just by the sheer size of the Russell 2000 Index, featuring America’s top small-cap stocks by market capitalisation, which is 10 times the number of companies comprised in the Australia S&P/ASX Small Ordinaries (XSO) index.

“The inefficiencies and relative under-coverage of the Australian market create fertile ground for identifying overlooked gems and undervalued assets,” he said.

“Of course, US small caps are larger in size than Australian companies. The average market cap of a US small cap is $6.3 billion, which is clearly enormous compared to an average Australian small cap market capitalisation of $840 million.

“The Australian market is considerably cheaper than the US market on a relative basis. Valuation differentials between the two markets are quite apparent, with Australian equities trading at more attractive multiples compared to their US counterparts.

“This affordability could appeal to investors seeking exposure to high-growth companies at more accessible entry points.”

Datt said the investment outlook for Australian small caps also supports his push for investors to look for opportunities in this area.

“Australian small caps present opportunities for growth, particularly in emerging industries like technology, healthcare, and renewable energy. These sectors may offer significant growth potential for investors seeking exposure to innovative companies.

“Whilst the US small cap sector is expected to the benefits from an ongoing economic recovery, improving economic fundamentals across our local economy could support the performance of Australian small cap companies.

“Continued innovation and investment in these sectors from both private and public investors could drive growth opportunities for small cap companies with unique business models and products.”