2025 was the year for large JSE stocks. The JSE All Share Index was up 36% – driven by goldies, PGMs, telecoms and tech. While the Small Cap Index managed just 14.7%.
At first glance, small caps seem left behind. But that very gap – the underperformance relative to large caps – could be the setup for a significant rebound in 2026. Here’s why…
2026 is shaping up to be even more favourable for small caps
After several bruising years, the environment is finally turning. Interest rates have moved lower, easing pressure across the economy. This matters disproportionately for small caps. Smaller companies tend to be more sensitive to borrowing costs, refinancing risk, and tight credit conditions.
When rates fall, cash flow improves quickly, balance sheets look healthier, and growth projects that once didn’t make sense suddenly do again.
We’re also seeing a pickup in corporate action…
CEOs are increasingly decisive and restructuring efforts have already proven successful in some cases.
Take iOCO (JSE: IOC), for example. This IT services company had been struggling quietly, but clever restructuring, better contracts, and a sharper focus on high-margin clients helped drive operating profit 275% higher and HEPS from -0.21cps to a profit of 40cps.
Or Blue Label’s (JSE: BLU) game-changing Cell C revamp – helping drive its share price +80% in 2025.
Unlike large-cap companies, where one operational tweak barely moves the needle, small caps can see dramatic improvements in earnings and valuation from a single well-executed initiative.
And despite the broader market rally, many small caps remain underpriced…
Past challenges, anaemic local growth and muted sentiment have left valuations disconnected from fundamentals.
For example:
• Calgro M3 trades at a PE of just 3, with a net asset value (NAV) per share of 1582c — the current share price is only 463c.
• Balwin Properties has a PE of 4.2, NAV per share of 946c, while the share price sits at just 286c.
• Texton Property Fund trades at 320c, well below its NAV per share of 574c.
These discrepancies highlight the kind of undervalued small caps that could benefit from renewed investor interest, corporate activity, and better market sentiment this year. The potential upside is significant if the market starts to re-rate these hidden gems.
When conditions normalise – even modestly – these gaps between price and underlying value often close quickly, creating opportunities for savvy investors.
For the curious, the contrarian, and those willing to look where others aren’t, JSE small caps may offer the most compelling opportunities in 2026. Make sure you’re on top of the small cap movement and subscribe to Red Hot Penny Shares.
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