Divergence creating small cap ‘princes and paupers’ – but will a catalyst for change emerge in 2025?

Mike Younger

A massive divergence in the valuations of small cap companies on the ASX is creating a ‘princes and paupers’ scenario with potential opportunities for active managers, according to a small cap investment expert.

The ‘princes’ are more expensive than they have ever been, while the ‘paupers’ include many good companies which are now very cheap, according to Mike Younger, Portfolio Manager for the Prime Value Emerging Opportunities Fund.

Younger said 2024 was a momentum year. “There has been a big divergence with expensive quality companies at the larger end of the small cap spectrum, and decent smaller companies now cheap.

“Expensive stocks became more expensive, you had exceptional numbers from a few high flyers and there were some that were left behind.

“It’s not a global phenomenon, either. In some cases Australian valuations are through the roof. Some sectors contain stocks trading at 50x earnings, which is interesting when compared to ‘Magnificent Seven’ companies where most trade at 25-30x earnings.

“This makes 2025 a really interesting year. Such divergence creates a good environment for active management in small cap investing.”

Adding to the interest are high bond yields and robust rate cut speculation, Mr Younger said. “Focusing on companies with earnings growth, and having an eye to valuation is key. But it’s a balancing act.

“A catalyst for change could be rate cuts – the cheaper stocks which have a few question marks regarding earnings growth could come back into vogue. Many of these are good companies whose valuations are currently the lowest they have been in five years.

“The elastic band may snap at some point, and you’ve really got to manage that risk and the opportunities.

“Regardless of rates, economy and earnings growth – when there is change, there is always opportunity to find companies with strong growth drivers”, Mr Younger said.

The Prime Value Emerging Opportunities Fund has outperformed the Small Ordinaries Accumulation Index for each of the last seven calendar years. It has delivered 11.6% after fees per annum for the year to 31 December 2024, and 11.4% per annum net of fees to investors since inception in 2015. The Fund is rated Highly Recommended by Zenith.

Prime Value Asset Management was founded in 1998 and is part of an investment group including Shakespeare Property Group, managing over $3 billion in equities, income securities, direct property and alternative assets.