Small caps and 4 other themes VanEck thinks you should watch

“The outlook for Australia in terms of growth is softening. Hiring intentions have slowed. Consumer confidence is also low, and we're likely to see rates higher for longer for quite a period,” McCormack says.

“In terms of our next house view, we do think there's a strong likelihood of another hike in September, given how persistent inflation is and given the higher than expected GDP print we did see today, and we do think there's a possibility of another rate hike on top of that by year end as well.”

Key economic numbers:

• Headline inflation: 3.5% year-on-year to July
• Trimmed mean inflation: 3.6%
• Minimum wage increase: 4.75% from July, adding fresh upward pressure
• GDP growth (Q2): 0.4% for the quarter, 2.1% year on year — above expectations but quarterly annualised rate of ~1.6% signals slowing momentum
• Consensus GDP forecast: growth potentially falling toward 1% and staying below 2% for a few years
• Unemployment: 4.5%, forecast to grind higher over coming months
• Sydney and Melbourne property prices: down more than 3% over the last three months — affecting 40% of the Australian population
• Probability of rate hike this year: 80% as priced by markets
• Australian 10-year bond yield: hitting 5.2%, a level not seen since 2011

All of this has combined to deliver, in VanEck deputy head of investments Jamie Hannah’s words, a soft result in August. It also stood in sharp contrast to the much stronger story in the US.

So, what are the themes VanEck says should be on investors’ radars?

Small and mid caps

While the ASX 200 delivered that 0.8% aggregate earnings surprise, equal weight came in closer to 3%, mid caps were stronger again, and small caps - specifically those screened on a growth-at-reasonable-price basis - produced an earnings surprise of around 11%.

"There is a distinct bifurcation or difference in the market between large caps and small caps," Hannah says.

The recovery in small and mid caps has been notable since the February rate hike drawdown, which hit both cohorts harder than the broader index.

“What we've seen in this last earnings season is that they've both produced a better rebound than what we've seen over the broad ASX 200 index. So this is indicating, once again, that some opportunities still exist in the small and mid cap space of the market.”

The valuation case reinforces the performance story. Large caps are trading near the upper bound of their historical price-to-forward-earnings range. Small caps, by contrast, are trading at an 18% discount to large caps while also forecasting stronger earnings growth over the next one and two years.

“Mid caps and small caps are offering higher earnings growth potential at more reasonable valuations,” McCormack says. “That’s why we consider them offering much better value at the moment compared to large caps.”

“But when it comes to small caps in particular, there's a range of unprofitable companies, I guess junk companies more broadly speaking, so we do think being selective is really important in that space.”

Materials the standout sector

It should be no surprise that the materials sector is a winner for VanEck, with more than 63% of companies beating earnings expectations and nearly half delivering higher-than-expected dividends. Mining profits accounted for more than half of aggregate ASX 200 earnings per share growth.

The critical miners also accounted for a good portion of the strength in mid and small caps, McCormack says, particularly lithium, rare earth, and gold miners.

While the sector overall saw very strong performance, Hannah warned that results “very much depended on which metals or mineral you were heavily involved in”.

1. Gold - Gold miners delivered some of the strongest results of the season, and the structural tailwind - central bank buying, dollar weakness, geopolitical risk premiums - remains firmly in place. 

“They've posted some extremely strong results, and we'd expect that to continue,” Hannah says.

2. Copper - BHP's pivot into copper delivered its clearest payoff yet, with copper revenue overtaking iron ore for the first time in the company’s history. The copper price has risen 15% this year alone, driven by the twin demand engines of AI data centre buildout and the energy transition.

3. Lithium - After years of pain following the collapse in lithium carbonate prices, the sector staged a meaningful recovery. Mineral Resources (ASX: MIN) delivered better-than-expected results as the lithium carbonate price bounced 30 to 50% from its lows. The fundamental demand story from batteries, energy storage, and electric vehicles has not diminished.

4. Critical minerals - Lynas (ASX: LYC) reported revenue up 76%, but missed consensus and shares fell. The structural demand for rare earths, particularly NdPr used in electric motors and defence applications, remains acute. Arafura (ASX: ARU) is still building out its refining capability and is expected to be operational within the next couple of years, which should add further capacity to the domestic critical minerals market.

5. Iron ore and coal - Iron ore was the weakest part of the sector, with Fortescue's net income falling 15%, its dividend cut, and the stock finishing down 6.7%. The demand equation for iron ore is tied to global construction and infrastructure activity, both of which are subdued. Coal was broadly mixed, with New Hope and Whitehaven both delivering ambiguous results as the sector continues to navigate the long-term transition away from thermal and coking operations.

Banks and consumer discretionary

The banks broadly met earnings expectations and net interest margins held steady just below 2%, but the market looked past the reported numbers and focused entirely on what comes next.

“The key focus in terms of the results was really the flow on effect in terms of the federal budget changes around capital gains and also negative gearing, and what all banks reported was a slowdown in loan applications post the federal budget in May,” McCormack says.

Investor loans fell 30% following the budget, while total applications across the board were 15% lower than the prior period and 17% lower than the same period in 2025. CBA is now forecasting credit growth to slow from 8.5% in 2026 to 5-7% in 2027.

With the banks already trading well above their five-year average at around 20 times forward earnings, the market had no tolerance for softer guidance.

"From a forward-looking perspective, it does look potentially a bit more challenging," McCormack says of the banks. "Loan growth is likely to slow, there's more focus on retaining deposit customers, and valuations are still quite stretched compared to historical levels."

“The key driver of whether it was positive or negative, really came down to forward guidance,” McCormack says.

Using JB Hi-Fi (ASX: JBH) as an example, he notes that even a company considered to be a strong operator has seen cost living pressures come through and revenue growth slow over the last few months.

“Electronics at the moment are obviously difficult to sell. The PC manufacturers, the laptop manufacturers are competing with the AI boom for memory chips, and it's really pushed the price of the underlying PC market up considerably with 50 to 100% rises in underlying prices,” Hannah adds.

Office REITs

“We did see office REITs outperform,” McCormack notes. “And I think when you look at the valuation, they're trading at pretty significant discounts to NTA, which does present an opportunity.”

The broader REIT sector remains under pressure from higher interest rates, which both increase the cost of debt and compress the relative attractiveness of yield. But the office sub-sector's outperformance this season suggests that the worst of the negative sentiment may already be priced in and that the recovery, when it comes, could be sharper than most investors currently expect.

"From a forward looking perspective, if you're looking to be a bit more contrarian, I think A-REITs is certainly an area to consider."