Advisers eye small caps amidst rising valuation concerns: Fidante

The results of Fidante’s Adviser Markets Survey drew answers from over 200 financial advisers, and according to the firm has revealed improved market confidence with “positive sentiment towards small caps and emerging markets almost doubling since April 2025”.

More than 60 per cent of advisers surveyed were “bullish” or “very bullish” on Australian small caps over the coming six months, with this sentiment being reflected in global small caps (57 per cent) and emerging markets (53 per cent).

In global equities, 44 per cent of advisers identified technology as offering the best sector opportunities, while 30 per cent of advisers favoured resources in the local market.

Evan Reedman, general manager of affiliates at Fidante, noted that while 68 per cent 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,” Reedman said.

Anticipating outperformance, Fidante’s data reveals that advisers plan to increase allocations to Australian small caps (44 per cent) and global small caps (44 per cent). However, a more cautious strategy was reflected in emerging markets, with only 23 per cent of advisers planning to increase client allocation 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,” 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.”

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

Also revealed in the report were adviser concerns about high valuations in both local and global markets. Almost 40 per cent of advisers noted valuation concerns in Australian equities, while valuations overtook Trump as the primary concern in global markets (30 per cent).

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

“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 this, 77 per cent of advisers are now allocating up to 10 per cent of client portfolios to alternative assets.

“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,” Reedman explained.

He concluded: “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.”