Mid-caps in the spotlight: The case for a market sweet spot

For investors searching for growth without taking on speculative risk, the Australian mid-cap sector may hold the answer. That was the view shared by David Lloyd, portfolio manager at Ausbil Investment Management, during his presentation at the INZ: Investment Leaders Forum in Queenstown, where he described the mid-cap space as an “alpha hotspot” offering a blend of resilience, structural growth and selective exposure to compelling themes across the market.

Lloyd began by contextualising Ausbil’s investment process, which blends both macroeconomic and company-level analysis. The current macro backdrop, he argued, is becoming increasingly supportive for risk assets. Global GDP is forecast to lift from the low three per cents toward the mid-threes between 2025 and 2026, with moderate growth across key markets including the US, Europe, China and India. Importantly for Australian investors, inflation is expected to return to the RBA’s target band of two to three per cent, providing room for monetary easing.

This view underpins Ausbil’s constructive outlook for the Australian economy. Lloyd noted that rate cuts would be instrumental in shifting momentum from the public to the private sector. “The economy has been largely propped-up by the public side. We see rate cuts as pivotal to transitioning growth into private demand,” he said.

In that context, mid-caps look particularly well-positioned. Lloyd presented data showing that the S&P/ASX MidCap 50 Accumulation Index has delivered a total return of 204 per cent from the COVID market lows in March 2020 to July 2025, closely tracking the performance of the NASDAQ over the same period. That figure stands in contrast to the S&P/ASX 200, which has lagged significantly over the same timeframe.

Part of the appeal, Lloyd explained, is that mid-caps often represent companies at a “sweet spot” in their corporate lifecycle. They are typically either high-performing small-caps that have scaled into profitability or fallen large-caps that are in the midst of a turnaround. These businesses tend to be well-managed, focused on execution and capitalised to pursue meaningful growth.

The growth figures are compelling. Lloyd pointed to Bloomberg consensus estimates forecasting mid-cap earnings per share growth of 16.5 per cent in FY26, compared with just 1 per cent for the S&P/ASX 50. Even the broader S&P/ASX 200 sits well below, with a forecast growth rate of 5.6 per cent. “You’re paying 20 times earnings in the top 50 for almost no growth,” he said. “In the mid-cap and small-cap space, you’re getting growth that justifies the multiple.”

Beyond growth, sector diversification is a major strength of the mid-cap index. Unlike the S&P/ASX 200, where banks represent more than 25 per cent of the benchmark, mid-cap investors can choose whether to hold bank exposure at all. “Even if I didn’t like banks as an S&P/ASX 200 manager, I’d still have 15 to 20 per cent of my fund tied up in them. With mid-caps, I don’t have to,” Lloyd said.

Resources is another area where mid-caps shine. The space includes capital-light, high-margin producers like Sandfire Resources (copper), Lynas Rare Earths (rare earths), Whitehaven (coal) and Champion Iron (iron ore). These companies offer targeted exposure to specific commodities with well-managed balance sheets and global demand drivers. Unlike large-cap miners that may dilute commodity exposure across multiple assets, or small-cap explorers reliant on capital markets, mid-caps can provide precision with lower risk.

The portfolio themes Ausbil favours include structural growth (via names like REA Group and HUB24), global thematic exposure (Reece and Reliance Worldwide Corporation), and technology and infrastructure tailwinds. While Lloyd acknowledged some names would be familiar to delegates, he emphasised the importance of stock-level attributes. “Some are domestic, some international. We can play specific themes while maintaining portfolio flexibility,” he said.

Ausbil’s own earnings forecasts sit ahead of consensus, driven in part by a more constructive view on the resources sector. Lloyd said he expects this positioning to bear fruit over the next 12 months as rate cuts improve sentiment and capital-allocation decisions across sectors.

While acknowledging the potential for volatility, Lloyd underscored the performance consistency of mid-caps. Across an extraordinary five-year period that included COVID, inflation shocks, rate hikes, geopolitical tensions and regulatory uncertainty, the index delivered more than 13 per cent a year.

“Mid-caps have shrugged all of that off. It really speaks to the resilience of the businesses in that index,” he said. From a performance standpoint, the sector has delivered two to three hundred basis points of annual outperformance relative to the broader market.

Looking ahead, Ausbil remains constructive on global growth, believing the back half of 2025 and into 2026 will reflect an improving backdrop for equities. “We think mid-caps are primed to continue outperforming the broader market, given the growth, the optionality, and the lack of drag from low-growth sectors,” Lloyd said.

For financial advisers, the message is clear: mid-caps offer a differentiated source of growth, free from the concentration risks of the large-cap index, and with greater granularity in both thematics and sector exposures. The challenge, as always, is execution. But the payoff, Lloyd argues, is worth the effort.

“Ultimately, we think this part of the market is structurally advantaged, and we expect that to persist,” he said in closing. “If the cycle does turn, these are the businesses you want to be holding.”

James Dunn

James is an experienced senior journalist and editor of The Inside Network's publications.