AI frenzy and Iran tensions lift small caps outlook

Binaya Dahal

Journalist

19 May 2026

Market volatility driven by geopolitical tensions and the artificial intelligence narrative is creating pricing inefficiencies that could favour small-cap investors over large-cap equities, says Michael Lovett, chief executive of Bell Asset Management.

Lovett said the outlook for Australian small caps appears particularly compelling, with earnings growth in the S&P/ASX Small Ordinaries Index expected to be roughly three times higher than that of the S&P/ASX 100 over the next two years.

“The uncertainty generated by geopolitical tensions and the AI narrative is driving heightened volatility and price dislocations,” he said. “This creates opportunities for investors with a patient mindset and strong risk management discipline.”

Bell Asset Management is also preparing to launch its first Australian small companies fund, with Lovett saying the timing is favourable as many existing small-cap managers are approaching capacity constraints.

“The timing for establishing our Australian small companies strategy is ideal,” he said. “With our new team now in place, we are well advanced in finalising the fund, which will launch within the next month.”

The firm has announced the strategy will sit alongside its global equities franchise, which it claims has focused on quality investing in international markets since 2003 through a bottom-up approach.

Portfolio manager Tim Johnston said the team would target undervalued but high-quality companies with the potential to deliver strong long-term returns.

“Small caps are cheap at the moment, with the Small Ordinaries currently trading at an 18 per cent discount to its 10-year average,” he said.

“We believe this creates compelling opportunities, particularly given the relative performance of large caps in recent years.”