Westpac Woes Fuel Shift to Small-Caps

Westpac's disappointing earnings report led to a sector-wide sell-off in Australian bank stocks on Monday, wiping 62 points off the S&P/ASX 200 Index and causing the bourse to lose 0.3 per cent.

In contrast, the S&P/ASX Small Ordinaries Index, which had its best week in six years just prior, gained 0.6 per cent on Monday and another 0.6 per cent on Tuesday after the Reserve Bank of Australia maintained the cash rate at 4.35 per cent.

The shift highlights a growing trend where investors are reassessing their market strategies, with money flowing out of heavily valued blue-chip stocks into smaller companies that have often been overlooked.

This phenomenon is attributed to large-cap sell-offs prompting investors to seek opportunities elsewhere, as noted by Dean Fergie, portfolio manager at Cyan Investment Management. Regal Partners, a hedge fund managing alternative investment strategies, has been actively pointing out the significant valuation gap between large and small caps on the ASX.

The appeal of small-caps is further supported by easing inflation concerns, which have tempered expectations for further interest rate hikes. Softer inflation data for the June quarter led to a 7 per cent surge in the Small Ords index since its publication, compared to a 2.4 per cent rise for the ASX 200.

Ellerston Capital sees the small-cap sector entering its most attractive phase in years, driven by a boom in artificial intelligence-related infrastructure spending. Companies directly benefiting from AI build-outs are expected to grow faster than the broader economy, according to portfolio manager James Barker.