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Nov 13 (Reuters) - Long overlooked as the backwater of the Australian equity market, small-cap stocks are having their best run in over a decade due to strong earnings and growth potential, as pricey blue-chip stocks have sent investors seeking value elsewhere, fund managers say. Sign up here. These factors have "prompted investors to look further down the market for value and growth, giving small-caps a relative bid they haven't enjoyed in years," said David Tuckwell, chief investment officer at ETF Shares. "The small end of the ASX has long carried the stigma of being a bit of a 'dumping ground', the place companies go once the market loses interest," Tuckwell said. SMALL CAP INFLOWS SURGE Meanwhile, the iShares MSCI Australia ETF , seen as a benchmark for foreign interest in Australian blue-chips, has seen allocations drop 13%. The small-cap index is trading at a price-to-earnings ratio of about 11, versus almost 20 for the benchmark blue-chip index, according to LSEG data, underscoring the value appeal of small caps. Hugh Lam, an investment strategist at Betashares, pins the rally on a supportive macroeconomic environment, marked by robust gross domestic product growth. "GDP growth ... tends to support cyclical areas of the economy such as consumer discretionary and industrials – two sectors where small caps have greater revenue exposure to," Lam said. WILL AN EXTENDED RATE PAUSE DERAIL THE RALLY? While lower interest rates since February have boosted small-caps, fund managers see little risk to the rally from the Reserve Bank of Australia holding off on more easing until next year, as widely expected. "I don't think the market was ever treating these stocks as an interest rate sensitive 'duration trade'," ETF Shares' Tuckwell said. Ron Shamgar, head of Australian equities at Tamim Asset Management, sees double-digit upside for small caps through 2026 even if rates stay flat. "Over the last three years, small caps have underperformed large caps by the widest margin in history, and for smalls to return to trend, there is another 20% upside," Shamgar said. ($1 = 1.5389 Australian dollars) Reporting by Rajasik Mukherjee in Bengaluru; Additional reporting by Sameer Manekar; Editing by Rushil Dutta and Jamie Freed
