Oil–Geopolitical conflict and why small caps is the winner in a recovery

This year has delivered a stark reminder: geopolitics is here to stay in markets. On 28 February, the United States and Israel launched extraordinarily coordinated airstrikes on Iran, killing Supreme Leader Ali Khamenei and triggering the most significant disruption to global energy markets since the 1970s oil crisis. 

The oil shock 

Entering 2026, the market’s view on oil was relatively negative. Brent opened the year around $61/barrel and inventories were at their highest since early 2021. Iran’s retaliatory closure of the Strait of Hormuz and Gulf oil exports down by 60% shattered that status quo. Brent surged past $126 in early March before pulling back to around $104, a roughly 70% increase year to date. The futures curve is in steep backwardation, with December contracts around $82, suggesting the market views the spike as an event rather than a structural shift. But the path from here depends entirely on the duration of the conflict and whether the US-led campaign to reopen the Strait succeeds. 

Is this time different? 

Historically, a rising oil price has been broadly positive for Australian small caps; previous cycles were typically demand-driven, with higher oil coinciding with strong global growth. This episode is fundamentally different. The spike is supply-side driven, and the second-order effects are predominantly negative: higher interest rates and inflation compressing valuations, cost of living pressures worsening, shipping disruption hurting importers, input cost pressures on miners and agriculture, and airspace closures weighing on travel. 

Higher oil prices has typically been positive for Australian small caps… this oil shock is different 

Source: MBA, Claude, March 2026 

That said, the political calculus favours a resolution on both sides. If the conflict de-escalates, the snapback in beaten-down sectors could be swift. The 25th of March offered this preview: the Australian Small Ordinaries index surged 4.1% on ceasefire hopes. 

Importantly, history tells us that macro shocks – while increasingly frequent this decade – have had limited lasting impact on Australian small cap returns outside of global economic crises.  

Macro shocks have mostly been noise for Small Caps. Global economic crises were the only exception 

Source: Morningstar, FactSet, MBA, Claude. Past performance is not a reliable indicator of future performance. Performance figures between 28 April 2000 to 31 December 2025. The chart assumes starting base of 100. 

The RBA: Tightening into a supply shock 

The oil shock has collided with an economy already facing inflation at higher levels than the RBA would like. Back-to-back 25bp hikes in February and March took the cash rate to 4.10% – the first consecutive tightening since mid-2023. Two additional interest rate hikes are expected by the end of the 2026 calendar year. For our portfolio, we favour companies with pricing power, strong balance sheets, structural thematics outlasting short-term cycles, and revenue visibility that helps to insulate them from cyclical impact. We have, for the most part, stayed clear of rate sensitive exposures such as discretionary retailers, real estate and financials. 

Small cap volatility creates opportunity 

The Small Ordinaries has fallen approximately 11% calendar year to date while the ASX 100 has fallen 2%. The result is that small cap valuations have become more compelling. The Small Ordinaries trades on roughly 16x one-year forward earnings – a 17% discount to the ASX 100, below its 10-year average of 18x. For context, Commonwealth Bank trades at 26x earnings for expected EPS growth of 3-4% pa over FY27-28. We’ve used the recent sell-off as an opportunity to purchase quality growth stocks at valuations we previously struggled to justify. 

Small Caps continue to show strong forward earnings growth. Valuations are more attractive now relative to large caps. 

Source: MBA, FactSet, Macquarie Equity Research, 11 March 2026 

Meanwhile, consensus EPS growth for small caps is forecast at 26% for FY26 and 18% for FY27, versus just 11% and 3% for all companies. Small caps are expected to deliver roughly 2.5x the earnings growth of the broader market this year. A significant share of this growth is coming from the resources sector, which now accounts for one-third of the index; but within the quality industrials we focus on, growth is driven by more idiosyncratic factors: market share gains, operational leverage, and disciplined capital deployment. 

Outlook 

While small caps can be vulnerable in sustained weak environments, the leverage comes through swiftly when the environment turns. The current combination of small cap valuations at an attractive discount to large caps, superior forward earnings growth, and elevated bearish sentiment creates a setup that has historically rewarded patient and opportunistic investors. The environment is uncertain, but it’s also precisely why we believe the opportunity set in Australian small caps is as attractive as we have seen in some time. 

Disclaimer
This communication is prepared by Antipodes Partners Limited ABN 29 602 042 035 AFSL 481 580 as the investment manager of the Maple-Brown Abbott Australian Small Companies Fund (ARSN 658 552 688) (the Fund’). Maple-Brown Abbott Limited (‘MBA’) ABN 73 001 208 564 AFSL 237296 (‘MBAL’) is the product issuer and Responsible Entity of the Fund. MBAL is not licensed to provide financial product advice. MBAL and Antipodes are subsidiaries of Antipodes Partners Holding Limited (ABN 91 602 828 526). Please read the Product Disclosure Statement (PDS’) and Target Market Determination (TMD’). Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.   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 document. 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. Units in the Fund mentioned in this presentation are issued by MBA. Before making a decision whether to acquire, or to continue to hold an investment in the Fund or any other securities, investors should obtain and consider the current PDS and Target Market Determination (TMD) or any other relevant disclosure document of those products. For the Fund, the PDS, AIB and TMD are available at maple-brownabbott.com/document-library or by calling +61 2 8059 7671.  This information is current as of 31 March 2026 and is subject to change at any time without notice. © 2026 Maple-Brown Abbott Limited.