With large caps outperforming small caps by about 20 per cent over the past two years, DNR Capital has highlighted the challenges that Australian small cap investors face.
Namely, investors are questioning the right valuation to pay for small caps in today’s market, characterised by elevated valuations and interest rate spikes, according to Sam Twidale, portfolio manager of the DNR Capital Australian Emerging Companies Fund.
“There is also a lot of disproportionate share price reaction to negative news,” Mr Twidale explained.
“No wonder small cap investors are faced with a dilemma today – buy cheap cyclical companies offering value or look at more expensive defensives that have resilience and earnings but come with high valuations?”
As such, DNR Capital has expressed a preference for quality businesses that, despite potential short-term challenges, are well placed for the longer term with strong balance sheets and management.
Specifically, the investment manager is looking at opportunities across D-rated quality stocks as the entry points have much lower valuations.
“Investors with a longer-term time investment horizon should be looking at these types of companies,” Mr Twidale added.
“As the market gets further clarity on the sustainable level of interest rates and the state of economy, the really deep valuation gaps between price and fair value will start to converge over time.”
