Small-cap businesses on the ASX have faced challenges in recent years, but the current economic landscape suggests it's time to consider these smaller market players for substantial gains.
Experts from Wilsons have highlighted that ASX small-cap shares typically underperform large caps, leading to economic slowdowns. This cycle has been no different, with small-cap shares significantly underperforming since 2021.
However, Wilsons points out that resilience in economic data and easing inflation pressures could set the stage for a strong rebound in small-cap stocks in 2024 and 2025 as both global and domestic economies gain momentum.
Why ASX Small-Cap Shares Are Attractive Now
Valuation Advantage
Wilsons notes that small-cap stocks are currently trading at a historically large discount compared to large caps. Global small caps are at their steepest discount in over two decades. Historically, when small caps have been this undervalued, they have often delivered strong returns in the following year, especially when economic conditions become more favourable.
Economic Rebound Potential
Small-cap shares have a track record of outperforming large caps during the early stages of economic recovery. With the economy poised for a rebound, as seen in 2009 and 2020, small caps are well-positioned for significant gains.
Impact of Interest Rate Cuts
Interest rates play a crucial role in the performance of small-cap stocks. Historically, when monetary policies eased in the year after an interest rate peak, small caps have outperformed large caps. Wilson says there are indications of a soft landing for the US and global economies, which lessens the risk of sustainably high interest rates. In Australia, similar outcomes seem to be expected in 2024, followed by growth in response to reduced policy rates.
Top ASX Small-Cap Picks
OncoSil Medical (ASX:OSL)
OncoSil Medical Ltd. is an Australian medical device company focused on advancing cancer treatment through innovative therapies. The company is known for developing the OncoSil device, a brachytherapy treatment designed to target pancreatic and other solid tumour cancers. OncoSil’s approach combines advanced science with clinical excellence to provide targeted therapies that aim to improve patient outcomes. The OncoSil device delivers targeted beta radiation directly into tumours using Phosphorous-32 microparticles, minimising damage to surrounding healthy tissues. It is intended for intratumoral implantation into pancreatic tumours via injection under endoscopic ultrasound guidance and is indicated for patients with locally advanced unresectable pancreatic cancer, in combination with gemcitabine-based chemotherapy.
The device has received CE marking in Europe and breakthrough device designation from the FDA, validating its efficacy and safety. These regulatory approvals pave the way for market expansion into the US and other regions.
Given OncoSil Medical's innovative approach to cancer treatment with its OncoSil™ device, the potential impact of interest rate cuts on its market prospects is significant. Lower borrowing costs can enhance the company’s ability to fund ongoing research and development initiatives. This financial advantage supports the advancement of clinical trials, accelerates regulatory approvals, and aids market expansion efforts, particularly into regions like the US. With a solid foundation in Europe and a promising pipeline bolstered by positive clinical outcomes, OncoSil Medical is well-positioned to benefit from favourable economic conditions, aiming to improve outcomes for pancreatic cancer patients worldwide.
Mesoblast (ASX: MSB)
Mesoblast, a leader in innovative cellular medicines, is poised to leverage potential interest rate cuts to bolster its growth trajectory. Mesoblast specialises in developing therapies that harness the regenerative properties of mesenchymal lineage stem cells. It targets severe medical conditions with significant unmet needs. Interest rate reductions can lower the cost of capital for Mesoblast, facilitating increased investment in clinical trials, regulatory approvals, and commercialisation efforts. This financial flexibility is crucial as Mesoblast advances its pipeline, which includes treatments for conditions like graft versus host disease and chronic heart failure. With a strong clinical foundation and promising results in ongoing trials, Mesoblast is well-positioned to expand its market reach globally, ultimately enhancing patient outcomes and shareholder value in the long term.
ASX small-cap shares like OncoSil Medical and Mesoblast offer promising investment opportunities as economic conditions improve and interest rates potentially ease. These companies, with their innovative approaches and strong growth potential, are well-positioned to deliver substantial returns in the coming years. Now might be the perfect time to add these dynamic small-cap stocks to your portfolio for significant future gains.
