Volatility in Australian small caps

Australian small caps are under pressure, and that could be good news for investors. A volatile start to 2025 has seen the asset class fall ~13% from January highs, creating valuation gaps not seen in a decade. Co-Portfolio Manager Matt Griffin explains why the team sees this as an attractive entry point, and where they’re finding opportunities across resources, energy transition and agriculture.

Transcript

It’s been a volatile start to the year for Australian small caps with geopolitical events, macroeconomic fears around rising interest rates affecting sentiment as well as sector specific impacts around the AI fears over software businesses and what that means for them in the future. Despite this, earnings delivery at the small end of the market has been quite positive with good revenue delivery, reasonable cost control, and rising commodity prices helping out the small resources part of the market, which accounts for about a third of the index.

International equity markets and Australian large cap markets have largely brushed off these macroeconomic and geopolitical fears with the S&P 500 and ASX 100 indexes trading at or around record high levels. The Australian small cap part of the market, however, has been hit fairly hard, down about 13% from January highs. For us as Australian small cap managers, this represents good opportunities down this part of the market, especially given the valuation and performance gap that has since opened up.

Australian small caps are trading on a one-year forward price to earnings basis of about 15 times which represents about a 15% discount to the 10-year average of the index and also about a 15% discount to the Australian large cap index the ASX 100. That is the largest discount we’ve seen over the past decade. That throws up opportunities for longer-term investors in the space and we think investors allocating to Australian small caps at this point in the market cycle stand to make good gains over a 3 to 5 year time horizon.

We are focused on structural long-term winners in the resources space which really goes across two commodities.

Lithium being the first. Typically what’s happened in the past during periods of high oil and high petrol prices is heightened technology change and rapid pace of adoption of new technology for lithium. This means a greater adoption of electric vehicle and hybrid technology. We’re starting to see early signs of that already and the longer-term signs are looking very positive. Additionally, battery storage in terms of grid scale storage is an increasingly important market for lithium and countries will be looking to adopt this technology at a greater rate given they want energy security and less reliance on oil imports. For lithium, this means high long-term demand coupled with a sustained supply shortage in the short term sees us forecasting high prices for a longer period of time. We have one large position in the lithium producer in the fund at the moment and looking to add further exposure.

The second commodity we see as being a beneficiary of current turmoil is aluminium. Aluminium prices are directly linked to high power prices given it’s a very power intensive industry and we see power prices globally being elevated for the medium-term supporting aluminium prices. The second impact on aluminium is direct supply reduction from Middle Eastern attacks on aluminium refineries with outages that could range from 12 to 24 months. We therefore see aluminium and other parts of the supply chain including bauxite being quite supportive for prices over the coming 12 to 24 months.

The other sector we see as being a winner in the short term from current Middle Eastern conflict is the agriculture sector. This isn’t a part of the market we’ve typically invested in in the past, but we do see emerging opportunities in this space. Higher soft commodity prices, including crop prices, cattle prices, lamb prices will flow through to the sector, as well as other products such as crop protection products, insecticides, and herbicides.

This directly benefits a couple of ASX listed agriculture stocks including Elders and Nufarm. Two quite different exposures. Elders being at the quality end, they will benefit from high crop protection prices flowing through and high demand for those products as well as the agency model in the livestock space where they click the ticket on livestock sales. So we see Elders as representing an attractive investment at the moment given modest earnings upgrades expected, a solid pipeline of organic and inorganic growth and a reasonable valuation.

Nufarm is the other agriculture exposure we like at the other end of the quality spectrum. The company has had a tough few years with earnings downgrades and a stretched balance sheet. However, the tide is turning on both fronts. Earnings upgrades are starting to come through given high chemicals prices and crop protection as well as high fish oil prices in their omega-3 business. This should lead to a rapid deleveraging of the balance sheet and a debt for equity swap where equity investors will see a re-rate in their shares. This is a high risk proposition but one we see as representing quite a lot of upside.

It’s worth mentioning the risks in the agriculture space. If there are diesel and fertilizer shortages, that may lead to farmers deferring crops or impacting their creditworthiness. Generally, these agriculture companies provide long credit terms to farmers. So if there are any payment issues that may show up down the track in bad debts. But aside from that, we see both stocks as having underperformed the market significantly over the past five years, having earnings upgrades potential, which fits our process quite well and represent value at cheap multiples. So we like the space.

So in summary, while it’s been a tough start to the year for Australian small caps, we see this as being an attractive entry point for people looking for longer-term growth at this end of the market. We see attractive valuations given the performance differential over the past few months and we see a good range of stock and sector opportunities for investment.

Disclaimer
This material is prepared by Antipodes Partners Limited ABN 29 602 042 035 AFSL 481 580 as the investment manager of the Maple-Brown Abbott Australian Small Companies Fund (ARSN 658 552 688) (‘the Fund’). Maple-Brown Abbott Limited (‘MBA’) ABN 73 001 208 564 AFSL 237296 (‘MBAL’) is the product issuer and Responsible Entity of the Fund. MBAL is not licensed to provide financial product advice. MBAL and Antipodes are subsidiary’s of Antipodes Partners Holding Limited (ABN 91 602 828 526). Please read the Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’). Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund. Any views expressed on individual stocks or other investments, or any forecasts or estimates, are not a recommendation to buy, sell or hold, they are point in time views and may be based on certain assumptions and qualifications not set out in part or in full in this document. Information derived from sources is believed to be accurate, however such information has not been independently verified and may be subject to assumptions and qualifications not described in this document. To the extent permitted by law, neither MBA, nor any of its related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of this information, or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on this information. Units in the Fund mentioned in this presentation are issued by MBA. Before making a decision whether to acquire, or to continue to hold an investment in the Fund or any other securities, investors should obtain and consider the current PDS and Target Market Determination (TMD) or any other relevant disclosure document of those products. For the Fund, the PDS, AIB and TMD are available at maple-brownabbott.com/document-library or by calling 1300 097 995. This information is current as of 15 April 2026 and is subject to change at any time without notice. © 2026 Maple-Brown Abbott Limited.