As Aussies submit their end-of-financial-year (EOFY) tax returns, some may be looking to invest their returns to generate returns.
EOFY is often when investors revisit existing positions and look for opportunities the market may have overlooked.
A new report from VanEck has highlighted a sector that is largely being overlooked – international small-caps.
International small caps remain attractively valued despite improving earnings and manufacturing activity, making them an overlooked EOFY investing opportunity.
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Trading below historical averages
According to the report, despite signs that economic conditions are proving more resilient than expected, international small caps remain one of the few areas of global equity markets trading below historical valuation averages.
The recent Federal Reserve meeting reinforced this view, suggesting the backdrop may not be as weak as many investors had anticipated.
For investors reviewing portfolios ahead of EOFY, that disconnect between improving fundamentals and cautious valuations may be worth paying attention to.
Economy remains resilient
VanEck argues that while the US Federal Reserve's more hawkish stance has led markets to expect interest rates to remain higher for longer, the broader economic backdrop is becoming increasingly supportive for international small-cap companies.
A resilient labour market, improving hiring intentions, and a return to expansion in US manufacturing activity suggest a reflationary environment that has historically supported stronger earnings growth and outperformance among quality small caps.
As economic activity and corporate earnings improve, VanEck believes current small-cap valuations may present an attractive investment opportunity.
While the macro environment may be supportive, the most compelling reason for investing in this space may lie in where valuations are at.
International small caps are one of the few major equity asset classes still trading below their long-term average valuation levels.
Earnings beginning to respond
According to VanEck, one of the more encouraging signs for small-cap investors is that earnings expectations are starting to improve.
Forward earnings forecasts for global small companies have begun accelerating after an extended period of weakness.
Historically, this has been an important signal, with improvements in earnings expectations often accompanied by stronger small-cap performance.
How to gain exposure to quality small-caps
For those looking to turn their tax return into a growth opportunity, one ASX ETF to consider is the VanEck Msci International Small Companies Quality ETF (ASX: QSML).
It provides exposure to 150 of the world's highest quality international small companies, selected using a disciplined framework focused on high return on equity, earnings stability and low financial leverage.
This approach seeks to capture the growth potential of small companies while maintaining a focus on businesses with stronger fundamentals.
