Opportunity: Global small companies

The terms small companies or small-caps describe a segment of the share market where companies have a low market capitalisation — a company’s current share price multiplied by the number of outstanding shares owned by shareholders — relative to other listed companies. Generally, globally listed companies are considered small-caps if they have a market capitalisation of between US$250 million to US$2 billion. Companies in this segment of the market can be found across all sectors, industries, and growth phases. However, many are in the earlier stages of development and can offer significant growth potential.

Small-cap shares tend to be more volatile than large-cap shares. Due to their size, small-caps are typically more sensitive to changes in market conditions, economic factors, and investor sentiment. More recently, small-caps have underperformed large-caps due to fears about the possible impact of a slowing economy, higher interest rates, and weaker consumer demand.

With global economic growth more resilient than expected, the risk of recession falling, and the likelihood of central bank interest rate cuts strengthening, we believe the environment is poised for the global small-cap segment to outperform. Furthermore, current valuations are well below historical averages and at multi-decade discounts to large-caps, and we expect this gap to narrow over time.

To take advantage of this opportunity, we have increased the allocation to global small-cap specialist manager Yarra Global Small Companies within the Partners Long Term Portfolio.