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While most smallcap indexes around the world tend to trade at a premium to their associated larger cap index, the Australian market is an exception. Smaller companies have traditionally traded at around a 15% discount to larger companies in Australia, however, this has reversed and they now trade at a 7-8% premium. In this video, Ben Griffiths, Portfolio Manager at Eley Griffiths Group, explains why he still sees fundamental strength in emerging companies.

“I think we will see a bigger premium in smallcaps. That is traditionally when the bell rings for the rotation from smallcaps back into bigcaps, where you look to buy smallcaps again when they trade at their traditional 15% discount.”

Key points

  • Large-cap and international investors have been playing in the smallcap space
  • These investors are just “passing through”
  • There’s been a rotation out of smallcaps by these investors since around August last year
  • The local market for emerging companies has not traditionally traded at a premium to large-caps for an extended period
  • Despite the sell-off, there is underlying fundamental strength in Australian smallcaps.

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Graeme Holbeach

It would seem logical that the Australian situation of small caps usually trading at a discount to large caps would primarily be due to dividend imputation. Emerging companies pay lower dividends and so don't attract the imputation premium.

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