The case for global small and mid-caps: A 25% discount (and 4 stocks to watch)

Please note this interview was filmed on 11 March 2025.

The key equity hunting grounds for Australian investors - the ASX 200 and S&P 500 - look expensive.

The S&P 500 is trading at a forward P/E of 19.8, while the ASX 200 sits at 18.3—both above their 10-year averages of 18.3 and 14.7, respectively, according to data from FactSet and Morgan Stanley.

With valuations stretched, investors may look to alternatives like Europe and emerging markets. But according to WAM Global’s (ASX: WGB)  Lead Portfolio Manager, Catriona Burns, an even more overlooked opportunity lies in global small and mid-caps (GSMIDs)

Burns argues that now is the time to look beyond mega-cap dominance and consider smaller, high-quality companies. Unlike large caps, even those appearing cheap in Europe, select GSMIDs offer not just attractive valuations but also significant growth potential and market share expansion.

In a recent conversation, she shared why she sees global small and mid-cap companies as a compelling opportunity and how she identifies the best prospects in this space.

The case for global small and mid-caps

While large-cap stocks have captured the spotlight in recent years - especially with the rally in the "Magnificent Seven" tech giants - Burns emphasises that GSMIDs offer significant opportunities, particularly as monetary conditions ease.

“Over the recent years, we have seen performance from the market come largely from those Magnificent Seven stocks, so it's been a very concentrated market," she says.

"In terms of interest rates coming down and the fact that the concentration of markets is so high right now, really it does pay to go hunting below that big end of the market."

She also points out that smaller companies are currently trading at steep discounts, offering investors a chance to buy high-quality businesses at more compelling valuations. 

“The bifurcation and the discounts for global small and mid-caps right now really does make it even more compelling than it might've even been a few years ago.”

Key investment criteria: What sets winners apart?

Burns and her team take a meticulous approach to identifying winning GSMIDs. She outlines the key characteristics they look for:

1. Market leadership and growth potential – “The characteristics we do look for include finding companies that have a market-leading position or that have the opportunity to capture an industry to be the number one player.”

2. Management quality and alignment – “We look for the quality of the management team and overlay that with how much stock do they own and understand our alignment to that management team.”

3. Earnings growth and valuation – “What is the earnings growth potential of the business and how sustainable is that over time? And we then overlay that, comparing it to the valuation and then try to identify a catalyst to drive the share price.”

Current high-conviction investments

Burns highlights several companies in WAM Global’s portfolio that exemplify these characteristics and are positioned for growth:

• Hemnet (ST:HEM) – Often compared to Australia’s REA Group, Hemnet is the leading real estate marketplace in Sweden. Burns sees enormous upside, noting that the company is still in the early stages of monetising its platform. “We think they can triple their revenue over the next few years as they do monetise that. And they have the playbook when they look at other players in the world, like REA and Scout24, who have successfully commercialised their offering."

• CTS Eventim (ETR:EVD) – Europe’s Ticketek equivalent operates in Germany, Italy, Switzerland, and Austria, with U.S. expansion as a key opportunity. Burns sees potential if it captures market share from Live Nation: "We think it's a really exciting revenue opportunity. The company is founder-led, with strong alignment - its founder holds 38.8% of the stock"

• Tradeweb (NASDAQ: TW) – A leader in the electronification of fixed-income markets, Tradeweb is transforming a traditionally voice-driven industry. “While equity markets have been 90% digital for years, the fixed income markets are very much voice-driven in a lot of cases depending on the security. So we think these are very high incremental margin businesses and it's decades behind the equity market.”

• RB Global (TSE:RBA) – This auction marketplace specialises in second-hand equipment, benefiting from cyclical demand and strong incremental margins. “These businesses don't have huge capital intensity and high incremental margins.”

Managing risk in smaller companies

Investing in small and mid-cap companies naturally comes with increased risk, particularly in times of economic uncertainty. However, Burns stresses that size alone does not determine a company’s risk profile.

“For us, it doesn't matter if you're small, mid or large in size, we're assessing those characteristics of balance sheet, earnings growth potential etc. regardless of size,” she said.

“Absolutely there are some small companies that do have smaller balance sheets per se because they're smaller companies, but they might have net cash balance sheets, which mean that they're not exposed to risk from having high levels of debt if revenue and earnings come under pressure.”

Position sizing also plays a key role in risk management. 

“So for us, it's a very much bottom-up assessment of the company - what is the quality of its balance sheet? Does it have low levels of debt? And then again, those characteristics that we look for in terms of the quality of the management team, the earnings growth potential, and the industry position," she says.

The Trump effect: Navigating policy volatility

With the return of Donald Trump to the White House, global markets are bracing for potential shifts in policy, including trade tariffs and regulatory changes. Burns, however, is not overly concerned.

“I think it's not unexpected what he is doing. We all lived it last through the 2016 Trump Administration. I think that was to be expected that there was going to be volatility, and that's why we do own businesses like the exchanges. They benefit from volatility and why we positioned away from companies that we thought would be at risk from tariffs because you kind of know his playbook," she says.

Rather than reacting to short-term policy changes, Burns and her team focus on building a resilient portfolio that can thrive in different macroeconomic environments.

“Sure, you don't know what deal he's going to strike and then reverse, but you do know that there's going to be volatility and noise. So for us, it was trying to get positioned in a way that where we can take advantage of the opportunities."

Final thoughts: Why GSMIDs now?

The current investment landscape presents a unique opportunity for GSMIDs. With interest rates easing, market concentration at extreme levels, and valuations for small and mid-cap companies looking attractive, Burns believes this is an excellent time to allocate capital to this segment of the market.

“We are seeing lots of stocks selling off. So even great companies, you're getting at better prices. So I think it's an absolutely great time to be allocating to global equities," she says.

Learn more

WAM Global (ASX: WGB) provides investors with exposure to an actively managed diversified portfolio of undervalued international growth companies and exposure to market mispricing opportunities. For further information, please visit the WAM Global website.