Do Aussie small caps punch above their weight than American small caps?

March 26, 2024: The US small cap sector might offer greater depth and diversity, but Australian  small caps present distinct advantages for investors seeking value and growth according to Datt  Capital.  

“The inefficiencies and relative under-coverage of the Australian market create fertile ground for  identifying overlooked gems and undervalued assets,” said Emanuel Datt, CIO of Datt Capital.  

The Russell 2000 is the most common index for US small caps and comprises America’s top small-cap  stocks by market capitalisation. It provides 10 times the number of companies relative to the  Australian small cap index, the S&P/ASX Small Ordinaries (XSO).

“Of course, US small caps are larger in size than Australian companies. The average market cap of a  US small cap is $6.3 billion, which is clearly enormous compared to an average Australian small cap  market capitalisation of $840 million,” Datt said.  

This means the US market is undeniably deeper and more mature compared to its Australian  counterpart, with that depth reflected in the number of available investment opportunities and the  overall liquidity of the US small cap equities market.

In contrast, Datt points out that the Australian small cap market remains under-researched. This  inefficiency can present unique opportunities for astute investors to uncover undervalued assets and  generate outsized returns.

“The Australian market is considerably cheaper than the US market on a relative basis,” Datt said.  “Valuation differentials between the two markets are quite apparent, with Australian equities  trading at more attractive multiples compared to their US counterparts.

“This affordability could appeal to investors seeking exposure to high-growth companies at more  accessible entry points.”

The outlook for the Australian small cap sector looks bright.  

“Australian small caps present opportunities for growth, particularly in emerging industries like  technology, healthcare, and renewable energy. These sectors may offer significant growth potential  for investors seeking exposure to innovative companies.

“Whilst the US small cap sector is expected to the benefits from an ongoing economic recovery,  improving economic fundamentals across our local economy could support the performance of  Australian small cap companies.

“Continued innovation and investment in these sectors from both private and public investors could  drive growth opportunities for small cap companies with unique business models and products.”

Ends

Notes:

US – Russell 2000 most common index is a subset of the Russell 3000, which is capitalisation weighted stock market index that acts as a benchmark of the entire U.S. stock market. It measures  the performance of the 3,000 largest publicly held companies incorporated in America as measured  by total market capitalisation and represents approximately 97 per cent of the American public  equity market.

AUS - The S&P/ASX Small Ordinaries (XSO) represents the small-cap component of the Australian  stock market. It includes all companies in the S&P/ASX 300, excluding those in the S&P/ASX 100.

About Datt Capital

Founded in 2016, Datt Capital is an independent investment fund manager based in Melbourne, Australia. The firm manages long-only strategies focused on delivering consistent, risk-adjusted returns through disciplined research and original thinking. Datt Capital invests primarily in Australian listed equities, debt, and derivatives, constructing portfolios designed to generate alpha with low correlation to broader markets.

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