Positive sentiment sees adviser appetite for small caps, EM return

Financial advisers have signalled their renewed appetite for opportunities among Australian and global small caps and emerging markets (EM), with expectations of a resurgent bounceback to rival the strong performance of large caps seen in the last few years.

According to the results of Fidante’s latest Adviser Markets Survey of over 200 professionals, more than 60 per cent were ‘bullish or very bullish’ towards Australian small caps over the next six months, with 57 per cent for global small caps and 53 per cent for emerging markets.

The data also indicated that 44 per cent of advisers were planning to “significantly increase” allocations to Australian small caps and 42 per cent to global small caps. Emerging markets were faced with a more “risk-aware approach”, with only 23 per cent of advisers planning to increase allocations to the sector.

While 68 per cent of advisers still expect strong performance from Australian large caps over the next six months, many signalled that they were increasingly looking for untapped opportunities “beyond traditional equity exposures, driven by broader market uncertainty and high valuations”.

“Large cap equities remain the ‘engine room’ for portfolio returns, but our survey revealed a clear focus among advisers on increasing satellite allocations in both Australian and global small caps,” Evan Reedman, General Manager of Affiliates at Fidante, said.

“Small caps have performed well, have historically offered a return premium, and can help to reduce concentration risk. In emerging markets, the story is more nuanced.

“Emerging market valuations are extremely attractive and recent performance has been strong. However, the associated risks are elevated. While opportunities vary across markets, current geopolitical tensions relating to China have contributed to a cautious approach among advisers.

“The current sentiment clearly highlights the need for an active, specialist approach to exploring opportunities in this asset class.”

The survey also highlighted the shift in sentiment towards alternative assets, as advisers move to look beyond opportunities in equities given high valuations and concerns over the impact of the Trump administration.

Approximately 77 per cent of advisers have allocated up to 10 per cent of client portfolios to alternative assets, with infrastructure (21 per cent), private credit (17 per cent) and private equity (16 per cent) the three most likely sectors to reap the benefits.

“Interestingly, concerns surrounding the Trump administration have more than halved since reaching fever pitch when we last surveyed advisers in April,” Reedman said.

“However, we are still seeing this dynamic play out. This includes rising concerns over inflation risk in global equities, driven by tariffs and Trump’s pressure on the Fed to cut rates, which may pose a notable threat to global markets.

“We are seeing strong demand for alternative assets that offer defence and diversification from traditional asset classes. We expect this to continue as more advisers and investors realise the power of unlocking alternatives in portfolios.

“Rightly, advisers are exercising caution when exploring this asset class, balancing risks, such as liquidity, against the return premiums on offer. A focus on governance and due diligence is also driving demand to well-established managers who have a proven track record across market cycles.”