Amidst heightened uncertainty and stretched valuations, advisers are turning to small caps to boost portfolio returns, according to Fidante’s latest Adviser Markets Survey released last Friday. The research, which surveyed more than 200 financial advisers, revealed improved market confidence with positive sentiment towards small caps and emerging markets almost doubling since April 2025.
More than 60 percent of advisers were bullish or very bullish on Australian small caps over the coming six months. This sentiment was also reflected in global small caps (57%) and emerging markets (53%).
In global equities, 44 percent of advisers identified technology as offering the best sector opportunities, while 30 percent of advisers favoured resources in the local market.
Evan Reedman, General Manager of Affiliates at Fidante, noted that while 68 percent of advisers still expect large-cap Australian equities to continue to perform strongly in the next six months, they were increasingly seeking 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,” Mr Reedman said.
Anticipating outperformance, the research showed advisers plan to significantly increase allocations to Australian small caps (44%) and global small caps (42%). Yet a more risk-aware approach was reflected in emerging markets, with only 23 percent of advisers planning to increase client allocations to the sector.
“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,” Mr Reedman said.
“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.”
Advisers diversify beyond equities
High valuations were the primary concern in both local and global equity markets. Almost 40 percent of advisers noted valuation concerns in Australian equities, while valuations overtook Trump as the primary concern in global markets (30%).
“Interestingly, concerns surrounding the Trump administration have more than halved since reaching fever pitch when we last surveyed advisers in April,” Mr 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.”
To combat these mounting concerns, advisers are looking beyond equities to deliver alpha for their clients. Today, 77 percent of advisers allocate up to 10 percent of client portfolios to alternative assets.
Infrastructure (21%), private credit (17%), and private equity (16%) were the key beneficiaries of this trend. Perhaps surprisingly, only 10 percent of advisers planned to allocate to commodities in the coming six months, despite gold reaching record highs.
“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,” Mr Reedman said.
“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.”
