“Despite the softer market, we believe there is little to suggest the outlook for company earnings has sharply deteriorated, and there appear to be pockets of the market that have surprised to the upside,” Mr Hudak said.

Such pockets included small-cap retail stocks like JB Hi-Fi and Super Retail Group, who managed to exceed expectations in their results and specifically mentioned expansionary fiscal and monetary policy as helping their business models in recent months, he added.

“Sales growth for retailers has been solid, with the majority also posting strong recent trading updates that lend further weight to the suggestion that economic stimulus is flowing directly to the consumer, for example, Adairs, Baby Bunting and Bapcor,” Mr Hudak said.

“It will be interesting to see whether this is just a temporary boost or the start of a broad recovery in consumer spending.”

While this economic boost was yet to carry through to companies with exposure to the motor vehicle and property market, pockets of high growth in the labour market were driving strong performance for salary packaging and novated leasing companies including SmartGroup and McMillan Shakespeare, he said.

Infrastructure and mining were two further strong performing sectors to watch in small caps as the economy showed small signs of improvement, Mr Hudak added.

“Contracting companies will likely benefit from the many government-funded infrastructure projects that are only part completed and the increasing pipeline of iron ore expansion projects in WA, for example, NRW Holdings and Decmil,” he said.

“Companies in this sector are, in our opinion, trading on cheap valuations compared to the market, and we believe we have the potential to re-rate on the back of contract awards.”