January 2026

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Looking ahead, we see several structural tailwinds for Australian small caps in 2026. The RBA's pivot to monetary easing should continue to support rate-sensitive sectors, with further cuts anticipated in the first half of the year as inflation moderates. Small caps historically outperform during rate-cutting cycles, particularly quality businesses with strong balance sheets that can reinvest at attractive returns on capital.

We maintain constructive views on select materials exposures. Gold remains well-supported by ongoing geopolitical uncertainty and central bank demand, though we prefer producers with operational leverage to the gold price over developers. The lithium market appears poised for rebalancing, with consensus expecting supply deficits to emerge mid-2026 as new EV demand outpaces delayed project commissioning. However, we remain selective given the capital intensity and execution risk inherent in the sector.

Defence and security spending continues to grow globally, providing durable demand for Australian technology companies serving this sector. We have maintained our positions in names with contracted revenue visibility and proprietary technology moats. Our overall portfolio positioning remains focused on quality compounders trading at reasonable valuations, with the capacity to deliver through various market environments.