The sinking value of resource companies, weighed down by declining prices for commodities, is helping other stocks in Australia’s small cap market.
In its latest review of small companies, Lonsec Research says the small cap market now offers greater balance and diversity than at the height of the resources bull market when miners and their service companies dominated.
Lonsec analyst Nick Thomas, in a note to clients called The good, the Bad and the Brave, says the fall has led to a healthier balance of companies and industries within the popular sector.
“The poor performance of resources has become a well-worn theme for small caps, persisting for the past four years,” Thomas says. “More recently, the main drags within the sector have been iron ore, gold and energy companies. This has also flowed through to put pressure on companies within the mining services sector.”
The ASX S&P Small Ordinaries index fell 3.8% in 2014. And a 2.8% gain by small industrials was wiped out by a 28.4% fall in small resources companies.
“Fund managers who have shown strong industrial stock selection, as well as avoiding the blow ups in mining and mining services, have produced solid returns during the past three years,” says Thomas.
“The obvious impact from the disparity between resources and industrials is that the materials and energy sectors now make up a far smaller proportion of the benchmark index. They have been replaced by increases in consumer discretionary stocks, financials and, to some extent, healthcare and telecommunications.”
Examples of extreme movements within the small cap index: