Small Cap underperformance presents fertile ground. The outperformance of small caps globally over the past 6-12 months is reflective of increased enthusiasm and optimism towards the outlook for economic growth. Australian small caps, on the other hand, have massively underperformed due to the large component of small resources companies in the index. According to Jeremy Bendiech of Avoca Investment Management this could present fertile ground to consider investing in Aussie small caps once the dust settled around resources. Avoca is looking at companies that even during a down turn in commodity prices are able to scrape through and keep producing. Western Areas (WSA) is an example of a company that has managed to survive despite poor Nickel prices. Should the Nickel price improve as global growth improves companies such Western Areas should be well leveraged to the recovery.
I agree with Jeremy. The definition of small cap is important here though. He said $500mil and upwards from memory, which may differ from others' concept of a small cap. Across the materials and energy sectors there are 100 above $500 mil. Throwing the net wider there are another 100 in the $100mil to $500 range. That means the other 800 stocks in these sectors are sub -$100 mil. And 500 of these are sub $10 mil! You wont find Avoca in that end of town.
The question on timing in terms of dust settling on the resources sector is a big one. I got the impression from listening to Jeremy that he is still really unclear on this front. You can see his argument in play across some sub sectors in the resources space with Iron ore being the obvious one and tin to a lesser extent.