“Mixed messages” for Aussie small caps

Yasmine Raso

Senior Journalist, Financial Newswire

25 January 2023

While Australian small cap stocks have kicked off 2023 with a strong performance, “mixed messages” are hovering around the market as to how long it will last, according to Prime Value Asset Management.

With the ASX Small Ordinaries Accumulation index already climbing by 6.8 per cent to 20 January this year, small caps Portfolio Manager at Prime Value Mike Younger said this trend comes as no surprise.

“Small caps are generally the first movers, and often have the ability to catch the market by surprise and post big gains relatively quickly,” he said.

“Currently the market is rallying on better economic data out of the US, and investors are wondering whether we might just be able to pull off a soft landing.

“However, it’s early days. There are still some question marks over earnings levels and some other unknowns on the horizon.”

Younger said the impending reporting season may not even be able to provide a stronger idea of small cap performance due to inflationary pressures on investment decisions and household expenses.

“This year around 30% of Australian mortgages will roll off low, fixed rates priced at around 2% and onto new variable loans at around 6%,” he said.

“Making it even more interesting will be reducing inflation rates as items such as used cars, soft commodities and freight costs pull back from heightened levels.

“Given such unknowns there’s likely to be some volatility at stages. But volatility goes with the territory in small caps and the current rally shows the importance of remaining invested and using volatility to your advantage – because the market can rally quickly and with little warning.”