Asian small caps offer best growth opportunities

With the Australian Securities Exchange (ASX) at all-time highs along with its US counterparts, many investors are turning to Asia for growth small-cap opportunities, according to boutique financial advisory firm Wattle Partners.

Drew Meredith, Wattle Partners director and financial planner, said he was still positive on the Australian economy, but there was trend building along with risks that stimulus was withdrawn too soon.

“As a result, we have increased our weighting to Asia within our equity portfolios,” Meredith said.

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“Now is the time to look beyond the more popular emerging market strategies, which may include allocations to Russia, Brazil and other developing nations, to rather specialised options targeted specifically at the Asian market.

“To avoid concentration risk within market cap weighted global indices including emerging markets, where as few as five stocks make up over 20% of the benchmark, we are investing beyond the well-known names such as Alibaba and Tencent, towards smaller and medium sized companies that tend to be under-researched and offer the greatest potential for outperformance.”

Meredith said the main reason this shift occurred was wariness over the momentum driven returns in the domestic market in recent years, along with a drop-off in quality in a limited domestic small-cap market.

“Whilst Australians continue to be pleased with economic recovery post the pandemic, the true beneficiaries have been countries like China, Taiwan and Korea among others, who have surged ahead with less reliance on monetary and fiscal policy,” Meredith said.

“Most have used the opportunity to undertake structural reforms setting a base for a sustained recovery.

“It is becoming clear that most powerful themes are now broader than the infrastructure and luxury consumption trends that dominated trades for the last few years in Asia.

“We see opportunities across technology and industrial sectors, with a particular focus on the burgeoning services and fintech sectors which are fast overtaking Silicon Valley and welcoming significant amounts of foreign capital.”

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