Market uncertainty fuels adviser interest in small caps and EMs

As ongoing market uncertainty sees advisers look beyond traditional equity exposure, Fidante’s latest Adviser Markets Survey found that the industry is now looking to opportunities in small caps and emerging markets for portfolio returns.

Based on a survey of more than 200 financial advisers, Fidante revealed that positive sentiment towards small caps and emerging markets almost doubled since its previous survey in April, highlighting growing confidence in the asset class.

Namely, it found that more than 60 per cent of advisers are now bullish or very bullish on Australian small caps for the coming six months, with this sentiment also reflected in global small caps (57 per cent) and emerging markets (53 per cent).

Fuelled by the expectation of outperformance in these sectors, some 44 per cent of advisers indicated intentions to increase allocation in Australian small caps, with a similar portion set to do the same for global small caps (42 per cent).  

However, just 23 per cent of advisers said they plan to increase client allocations in emerging markets, signalling a more risk-aware approach in this regard.

Speaking on the findings, Fidante general manager of affiliates Evan Reedman explained that while small caps have performed well and help reduce concentration risk, the story is “more nuanced” for emerging markets.

“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,” Reedman said.

With advisers facing a number of portfolio concerns, Fidante found they are now looking to alternative assets to deliver alpha for clients, with 77 per cent allocating up to 10 per cent of portfolios to alternative assets.

In particular, the survey revealed that advisers were planning to allocate to infrastructure (21 per cent), private credit (17 per cent) and private equity (16 per cent) were the key beneficiaries of this trend, while just 10 per cent were looking to allocate to commodities in the next six months.

With alternatives acting as defence or diversifiers in the client portfolios, Reedman suggested that interest in these assets is expected to continue as more advisers come to see the benefits of alternatives.

He added: “Righly, 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.”