A new report from VanEck has laid out the case for timely rotation into global small-cap stocks.
According to VanEck, many industry pundits are forecasting volatility. However, the macroeconomic backdrop and geopolitical uncertainty bode well for a quality rotation with global small companies.
ASX investors may target global small-caps to diversify beyond Australia's concentrated market of banks and miners.
Simultaneously, Aussie investors can gain exposure to faster-growing sectors like technology, healthcare, and advanced manufacturing.
Global small-caps can also provide higher long-term growth potential and access to opportunities driven by overseas economies and currencies.
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Early stages of a small company quality rotation
According to the report, global small company valuations, relative to large companies, are at a discount. However, being selective in small companies is important.
There are several signs that suggest we could be in the early stages of a small company quality rotation. These include:
- US manufacturing has shifted into expansionary territory with the ISM Index moving above 50, a backdrop that has historically favoured all caps as capex and production pick up, and QSML is well positioned via its tilt toward industrials
- US GDP growth outlook consensus forecast is around 2% for 2026 and 2027, a trajectory that bodes well for smaller companies in the market to harvest higher earnings growth
- Attractive valuations
- Higher-for-longer oil prices and elevated tariffs could lift inflation concerns and growth uncertainty, which could result in investors favouring quality small caps due to their defensive characteristics
Why small caps are starting to outperform
VanEck said markets have experienced significant volatility over the first four months of 2026.
While early concerns were driven by a weakening US labour market and AI disruption adversely impacting tech software earnings, the dominant narrative became the escalation of the US/Iran conflict.
This initially led to a broad-based market sell-off, with higher-risk segments such as small companies particularly impacted.
In the immediate aftermath, large-cap and energy stocks outperformed, supported by inflationary expectations and safe-haven demand.
However, as markets began to price in a potential de-escalation amid negotiations and non-negotiations, investor attention started to shift toward more compelling value opportunities.
One area that stood out is quality small-cap stocks. These have started to outperform both their benchmark (MSCI World ex Australia Small Cap Index) and the broad equities (MSCI World ex Australia Index) as investors rotate into segments with stronger fundamentals and attractive valuations.
How to gain exposure to global small caps
For investors looking to expand their portfolio to include global small caps, there are several ASX ETFs to consider.
Targeting ETFs can help spread the risk that often comes with small-cap investing.
Some options include:
- VanEck MSCI International Small Companies Quality ETF (ASX: QSML) – gives investors a diversified portfolio of 150 international developed market small-cap quality growth securities
- Vanguard MSCI International Small Index ETF (ASX: VISM) – provides exposure to small companies listed in major developed countries
VanEck said the US GDP growth outlook consensus forecast is around 2% for 2026 and 2027, with an AI-driven productivity boost potentially adding another 50 to 100 bps.
This resilient growth trajectory bodes well for smaller companies in the market to harvest higher earnings growth.
Taking history as a guide, we believe this backdrop (potential volatility) bodes well for a quality rotation within the global small companies' complex.
