Australian small caps February reporting season

Australian small caps are well positioned for the year ahead — and this reporting season reinforced why.

In this video, Phillip Hudak breaks down the key themes from reporting season including where positive surprises emerged, why mission-critical software businesses proved their resilience against the AI narrative, and why the team remains constructive on the smaller end of the market going forward.

With Australian small caps trading at a ~15–20% discount to large caps and superior earnings growth expected through FY26 and into FY27, the opportunity set looks attractive.

Australian small caps: February reporting season review

The latest reporting season proved more challenging for Australian small caps, particularly when compared to the resilience seen at the large-cap end of the market. In many ways, it marked a reversal from the more constructive sentiment observed in the prior period.

What drove this divergence, and what does it mean for investors?

Macro pressures weigh on small caps

A key driver was the macro environment. Interest rate increases at the beginning of the period had a disproportionately negative impact on small caps.

This reflects the structural differences within the market. Smaller companies tend to have higher exposure to consumer discretionary sectors, which are more sensitive to rising rates. By contrast, large caps, particularly banks, which account for roughly 40% of the index, benefited from the higher rate environment.

The major banks delivered strong results, with better-than-expected revenues, stable costs, and lower bad debt provisions. This translated into earnings upgrades and strong share price performance – support that was largely absent from the small-cap segment.

AI concerns in IT and SaaS

Another notable theme was the emergence of AI-related concerns within the information technology sector, particularly among SaaS businesses that are more heavily represented in small caps.

The prevailing market narrative suggests that AI tools could disrupt existing software workflows and erode the competitive positioning of some companies. However, reporting season results told a more nuanced story.

Many IT companies demonstrated improved cost efficiencies and margin expansion, with benefits flowing through to the bottom line. This raises an important question for investors: is the AI risk overstated?

At Maple-Brown Abbott, the focus remains on identifying businesses that provide mission-critical software solutions that are deeply embedded in client operations and difficult to displace.

Earnings remain the key driver

Consistent with historical trends, earnings were the primary driver of share price performance this reporting season.

Across the market, earnings upgrades were broadly in line with downgrades, albeit with a slight skew to the downside. Importantly, underperformance was largely driven by stock-specific factors rather than broader cyclical weakness.
This reinforces a core principle: earnings drive share prices.

Retail sector sees margin pressure emerging

The retail sector was one of the more notable areas of weakness.

While first-half sales were broadly in line with expectations, gross margins came under pressure due to increased promotional activity aimed at stimulating demand. Subsequent trading updates for January and February also disappointed.
Looking ahead, however, there are reasons for cautious optimism. A stronger Australian dollar is expected to benefit retailers in the second half of FY26 and into FY27, as currency hedges roll off and input costs improve.

Mining services as an area of strength

Despite the broader challenges, several sectors delivered positive outcomes.

Mining services and contractor companies stood out, benefiting from continued strength in both mining and infrastructure capital expenditure. Select investment managers also performed well, demonstrating an ability to navigate volatile market conditions.

The IT sector, while fundamentally solid in many cases, saw muted share price reactions due to ongoing AI-related concerns.

New Zealand shows early signs of recovery

Another area of interest was New Zealand, where early signs of economic recovery are beginning to emerge.

Interest rates have fallen significantly, from 5.5% in mid-2024 to around 2.25%, and the lagged impact of these cuts is starting to flow through the economy in 2026.

Encouragingly, several retailers with exposure to New Zealand have reported improved trading conditions, including stronger comparable sales growth. Even discretionary segments have shown signs of stabilisation.
The key question remains whether this recovery in retail will extend to other parts of the economy, such as construction and civil activity, which may follow with a lag into 2027.

A constructive view on small caps outlook

Despite the recent headwinds, the outlook for Australian small caps remains constructive.

Earnings growth expectations for the remainder of FY26 and into FY27 are stronger for small caps than for large caps. This is supported by meaningful exposure to resources, which now account for over one-third of the small-cap market. Within this, gold plays a significant role, alongside companies leveraged to long-term themes such as electrification and decarbonisation.

Valuations also present a compelling opportunity. Australian small caps are currently trading at a discount to their long-term averages and at approximately a 15–20% discount relative to large caps.
For investors, this combination of attractive valuations and superior earnings growth potential reinforces the case for maintaining exposure to the sector.

Disclaimer
This video is prepared and issued by Maple-Brown Abbott Limited ABN 73 001 208 564, AFSL 237296 (‘MBA’) as the Responsible Entity of the MBA Australian Small Companies Fund (ARSN 658 552 688 ) (‘Fund’) . This video contains general information only, and does not take into account your investment objectives, financial situation or specific needs. Before making any investment decision, you should seek independent financial advice. This video does not constitute an offer or solicitation by anyone in any jurisdiction. Past performance is not a reliable indicator of future performance. Neither MBA, nor any of its related parties, directors or employees, make any representation or give any guarantee as to the return of capital, performance, any specific rate of return, or the taxation consequences of, any investment. Any views expressed on individual stocks or other investments, or any forecasts or estimates, are not a recommendation to buy, sell or hold, they are point in time views and may be based on certain assumptions and qualifications not set out in part or in full in this video. These individual stocks referred to may or may not be currently held by the Fund. Information derived from sources is believed to be accurate, however such information has not been independently verified and may be subject to assumptions and qualifications not described in this document. To the extent permitted by law, neither MBA, nor any of its related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of this information, or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on this information. Before making a decision whether to acquire, or to continue to hold an investment in the Fund, investors should obtain and consider the current PDS and Target Market Determination (TMD) or any other relevant disclosure document. For the Fund, the PDS, AIB and TMD are available at maple-brownabbott.com/document-library or by calling T +61 2 8059 767. This information is current as of 5 March 2026 and is subject to change at any time without notice. © 2026 Maple-Brown Abbott Limited.