Australian small-cap companies are poised for a year of robust earnings growth, according to Michael Steele, co-portfolio manager of Yarra Capital Management’s Australian Smaller Companies Fund. Yarra Capital Management is a Melbourne-based firm managing approximately $20 billion in assets. After experiencing earnings declines for two years, the 2025 financial year marked a turning point, with the small-caps market achieving 7 per cent earnings growth. Steele anticipates this positive trend will accelerate in the 2026 financial year, projecting earnings growth exceeding 15 per cent.
This level of earnings expansion significantly outpaces that of larger companies, where single-digit growth is expected. Small-cap valuations are also more appealing, trading at a 12 per cent discount despite their higher earnings growth and a forward earnings multiple of only 16 times. While resources and energy sectors performed strongly in 2025, Steele notes considerable opportunities exist in other market segments, particularly growth companies that have underperformed in recent months.
Steele highlighted several stocks with potential. Among them is property fund manager Centuria Capital, which they believe may surprise to the upside, supported by improving inflows and asset valuations. He also mentioned Cuscal, an Australian payments company, as a market leader with defensive earnings growth. Additionally, AUB Group is viewed as significantly undervalued, especially when compared to international peers.
Steele emphasised the importance of a long-term investment horizon, contrasting it with the market’s often short-term focus. He believes that adopting a longer-term perspective can lead to superior performance by capitalising on short-term market disruptions and benefiting from compounding returns, as well as reduced transaction costs and tax impacts.
