Is it time to jump back into ASX small-cap shares?

One fund manager has revealed why it could be time to invest in smaller stocks.

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The ASX small-cap share end of the market could be an attractive area to invest in according to one fund manager.

All of the great, large businesses of today were small businesses at one point. Of course, not every small business is going to become a big company.

The good, smaller stocks could deliver good returns if they're able to scale up effectively. Additionally, smaller companies are typically under-researched compared to their larger peers, which can lead to discounted valuations.

Ronald Temple, Lazard's chief market strategist, has made a number of interesting observations about where he thinks value is at the moment and what he believes could happen next with markets.

Opportunity for ASX small-cap shares

Temple believes non-US markets are trading on "much less demanding valuation multiples". Some markets may benefit from accelerating growth while US growth "decelerates".

He also suggested non-US companies are typically more exposed to floating-rate debt – where the interest rate changes as central bank rates change – which "should benefit them disproportionately" as rate cuts happen outside of the US.

The market strategist also suggested that non-US companies could "enjoy a more significant recovery in revenue and earnings from current levels as their economies were less resilient after the pandemic than the US economy, which benefited from much larger fiscal and monetary stimulus."

Temple suggests the outlook is shifting, and short-term interest rates are going to head lower, which could lead to reduced earnings for cash, which could be bad news for people over-allocated to cash. He acknowledged some people may be reluctant to invest at, or near, record highs for share markets. What's the answer? The expert said:

My view is that the best approach is to allocate capital away from cash to riskier assets while identifying those "risky" assets that are less correlated to the most expensive parts of the global equity market (e.g., tech and AI leaders) and instead invest in areas of the market that have more unrecognized upside going forward. These include emerging markets, Japan, small-cap, and infrastructure-related equities.

This could spell good news for ASX small-cap shares.

Expectations for the rest of 2024

Temple outlined a number of thoughts about macroeconomic events that could occur in the second half of 2024. Some of these events could cause volatility for ASX small-cap shares.

He expects US growth and inflation to decelerate, allowing the US Federal Reserve to cut rates in the second half of 2024. A "razor's-edge" US election could have "significant economic and market implications".

The market strategist expects China's housing challenges to persist but with the cumulative effects of stimulus lifting growth. However, the West's efforts to defend their industries against Chinese competition are expected "to stiffen, adding to elevated tensions over China's support for Russian aggression in Ukraine."

Japan's inflation "normalisation" is expected to persist, leading households to reassess their asset allocation. Finally, slowing inflation in Europe is expected to enable a material easing of interest rates, adding "additional momentum to already-accelerating growth".

While the prospects look promising for ASX small-cap shares, the market segment is not guaranteed to outperform. But, it's certainly worthwhile keeping an eye out for exciting ASX small-cap shares, in my opinion.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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