Is it time to start buying up ASX small-cap shares?

Can small-caps deliver big returns? One fund manager has the answer.

| More on:
Kid putting a coin in a piggy bank.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ASX small-cap shares have a history of being volatile, but it's also the place where we can find the major winners of tomorrow. After everything that's happened recently, is this the right time to hunt for hidden gems?

Names like Altium Limited (ASX: ALU), Pro Medicus Ltd (ASX: PME) and REA Group Ltd (ASX: REA) were all very small businesses over a decade ago. Now they're all multi-billion dollar companies. Not every company will turn out as successful as that, but the small end of the market can be an exciting hunting ground.

Difficult environment for ASX small-cap shares

The market has faced a lot of disruption and volatility over the last two or so years because of elevated inflation and higher interest rates.

Fund manager Monash Investors has suggested over the last two years it has taken the market longer than usual to reward stocks that experience a (positive) step change in their outlook. This is because of a lower risk tolerance due to the "upward momentum in inflation and interest rates".

In this situation, Monash Investors said, the ASX large-cap stocks have tended to do well because of their "strong balance sheets, more stable businesses and better share market liquidity".

Inflation has supposedly largely benefited the revenue growth and profits of large companies, which are "more likely than small companies to have the pricing power to pass on inflationary pressures to preserve, or even grow, their margins".

Is this the time to invest?

Monash Investors certainly thinks so, commenting:

However, now that inflation is moderating and the market is anticipating interest rate cuts, we are moving into a much more favourable environment for small caps. Looking forward the large cap stocks generally have modest growth outlooks, while the headwinds to small cap growth are abating. If history is any guide to the future, investors will increasingly look to invest in the smaller end of the market.

Some of the positions that appeared to be in the Monash Investors Sml Companies Trust (Hedge Fund) (ASX: MAAT) portfolio within the last couple of months included Johns Lyng Group Ltd (ASX: JLG), Credit Corp Group Limited (ASX: CCP), Austin Engineering Ltd (ASX: ANG), NRW Holdings Limited (ASX: NWH) and Monadelphous Group Ltd (ASX: MND).

I recently wrote two articles, here and here, about ASX small-cap shares that I thought (and still think) look like excellent longer-term opportunities for investors. I've already bought two of them for my portfolio.

Should you invest $1,000 in Biome Australia Limited right now?

Before you buy Biome Australia Limited shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Biome Australia Limited wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 7 February 2025

Motley Fool contributor Tristan Harrison has positions in Altium and Johns Lyng Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Altium, Johns Lyng Group, Pro Medicus, and REA Group. The Motley Fool Australia has recommended Johns Lyng Group, Pro Medicus, and REA Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Small Cap Shares

A man slumps crankily over his morning coffee as it pours with rain outside.
Small Cap Shares

Why this Telstra-linked ASX small cap stock just crashed 90%

This small cap is having a very bad session. What's going on?

Read more »

A young boy wearing a hat, sunnies and striped singlet looks fierce and flexes his arm in victory.
Small Cap Shares

The ASX small-cap stock trading at 'half of the earnings multiple of industry leaders'

A leading fund manager sees a lot of untapped value for this soaring ASX small-cap stock.

Read more »

A man has a surprised and relieved expression on his face. as he raises his hands up to his face in response to the high fluctuations in the Galileo share price today
Small Cap Shares

These small cap ASX stocks could rise 15% to 70%

Analysts think big returns could be on the cards for buyers of these stocks.

Read more »

A female ASX investor looks through a magnifying glass that enlarges her eye and holds her hand to her face with her mouth open as if looking at something of great interest or surprise.
Small Cap Shares

2 under-$5 ASX hidden gems worth your attention

These buy-rated shares are flying under the radar. Let's see why analysts are bullish on them.

Read more »

Miner looking at a tablet.
Resources Shares

2 small-cap ASX mining shares exploding 40%+ on China tariff news

Investors are sending the small-cap ASX mining shares flying higher on Wednesday.

Read more »

Siblings jumping on a trampoline.
Small Cap Shares

3 ASX small-cap shares with a 'solid growth outlook' for 2025

A leading fund manager expects strong growth from these ASX small-cap stocks in 2025.

Read more »

A little girl with red hair runs excitedly with a rocket strapped to her back, trying to launch.
Small Cap Shares

Guess which ASX small-cap stock exploded 154% on big US news!

ASX small-cap stocks carry added risk, but also sometimes offer supersized rewards.

Read more »

A group of businesspeople clapping.
Healthcare Shares

This fund returned 109% in 2024. Here are 2 of its best-performing ASX shares

Small caps proved to be the winners last year.

Read more »