Market falls again – small caps feel the pain

Australian markets have now fallen for the longest consecutive period in more than 25 years, with significant early losses suggesting the S&P/ASX200 is set to fall for eleven straight days.

At midday the S&P/ASX200 was trading at 5662.5, 1.5% down on Friday’s close.

The single biggest reason for today’s negative sentiment was general disappointment at a $145 billion economic rescue package announced by US President George Bush on Friday.

Market analysts and economists generally felt the package would not be sufficient to prevent the US economy sliding into recession, pushing the Dow Jones Index 0.49% lower to 12,099.30 by its close on Friday.

And while listed companies across the board have been hit by the sub-prime led squeeze hitting sharemarkets, small cap companies – those with a sharemarket value of $100 million or less – have been hit particularly hard.

Small caps have collectively declined in value by around 11.5% in the past month, about 1% more than the top 200 companies measured by the S&P/ASX200.

Invesco’s head of small companies, Cynthia Jenkins, says while a rising tide lifted all boats in the positive economic setting of the last couple of years, the current volatility means some of the poorer quality small-caps are now starting to take on water.

“After five years of strong economic growth and market expansion north of 25% per annum, the risk appetite had become quite high – people were willing to invest in risky structures such as mining exploration and biotechs that require a lot of capital and don’t have earnings,” Jenkins says. “In the current environment, those companies are now finding it tough.”

Jenkins nominates financials stocks such as MFS and Allco, some of the mining services and exploration stocks and property stocks dragged down by the Centro disaster as the sectors most severely affected.

Not all businesses are losing out, however – Jenkins says the healthcare small-caps in particular are getting good support.

“Healthcare was a poor performer but it has come back into vogue – last year steady double digit earnings growth wasn’t exciting, but people are warming to greater certainty of earnings in the current environment,” Jenkins says.