Cyclical small companies may be among those most likely to...

Cyclical small companies may be among those most likely to outperform in an anticipated small cap recovery from the doldrums of the past few years.

Local small caps as a whole struggled last year as higher interest rates and slowing economic activity depressed demand for their goods and services, while simultaneously increasing their debt burden.

Earnings growth from small companies could be around 10 per cent per annum over the next two years. Simon Letch

In fact, the S&P/ASX Small Ordinaries Accumulation Index has underperformed the top 100 companies by 30 per cent over the past three years as investors have instead focused on the stellar gains in the US sharemarket and a small number of growth companies more generally.

That trend is now expected to reverse and there’s more to this recovery than just an anticipated reversion to the mean. Earnings growth from small companies could be around 10 per cent per annum over the next two years, compared to an average of just 2-3 per cent for the top 100 ASX stocks.

Cyclical small caps are primed to be among the standouts. The multiple rate cuts expected in Australia – potentially beginning as soon as February – will finally support a recovery in their customer demand and obviously reduce the cost of servicing debt.

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