Australian Equities – Investment Themes Observed in 2026
29 July 2026
Our specialist Australian Equities investment partner, Northcape Capital, shares the key themes they are watching in equity markets this year, as well as discussing the key opportunities and risks they are seeing as they position the portfolio.
This information has been prepared by Northcape Capital, the underlying investment manager for the Warakirri Concentrated Australian Equities Fund and Warakirri Ethical Australian Equities Fund.
Themes, risks and opportunities shaping Australian equity markets
Resources: Boom or Extrapolation?
One of the most difficult questions of the year was whether the market was correctly recognising a new resources boom or simply extrapolating a favourable set of spot prices. The distinction matters because the Australian market includes many resource companies that can perform exceptionally well during price spikes but destroy value over a full cycle.
The case for copper is credible, supported by electrification, grid investment, AI infrastructure and constrained new supply. However, investors extended this logic broadly across copper, lithium, rare earths and gold stocks. Our concern is that a compelling commodity narrative is not the same as a compelling equity investment. Data centers, for example, are expected to account for only around 2% of copper demand over the next five years. Lithium had an equally persuasive demand story in 2022, yet prices collapsed as supply expanded. Rare earths have experienced several cycles of intense enthusiasm followed by long periods of poor investor returns. Lynas illustrates this volatility, having traded between 33 cents and $23.40 over the past 20 years and has never paid a dividend to shareholders.
Exhibit 1: BHP Olympic Dam – one of the world’s most significant deposits of copper, gold and uranium
Source: BHP Australia
We maintain selective exposure to resources where quality and risk-reward are attractive. BHP remains a large position because its assets are low cost, long life and diversified, and management has demonstrated greater capital discipline than many peers. ALS and Orica provide exposure to mining activity with stronger and more sustainable returns on capital. We have also selectively held Rio Tinto, Newmont, Northern Star and Santos where the risk-reward has been compelling. However, we will not buy marginal resource companies simply because their share prices are rising. Chasing momentum without conviction is not consistent with our investment process.
This discipline detracted from relative performance in FY26, but it is the same discipline that has historically helped avoid permanent capital loss. Commodity cycles often encourage investors to confuse price momentum with business quality, a dynamic that appears more pronounced in an environment where passive and momentum-driven strategies represent a larger share of trading activity.
Market Structure and Mispricing
This dynamic is not limited to resources but reflects broader changes in market structure. A growing share of equity market activity is driven by passive strategies, quantitative funds and short-term earnings revisions, leading to an increased focus on relative rather than absolute risk. At the same time, short-horizon investors remain highly responsive to earnings surprises and near-term catalysts, while regulatory settings such as Your Future, Your Super have reinforced benchmark awareness among asset owners.
The interaction of these forces has contributed to heightened volatility in individual stocks, particularly around reporting periods. Modest deviations from expectations have often resulted in outsized price movements, suggesting that liquidity is increasingly sensitive to flows rather than fundamentals.
This creates an environment in which share prices can move materially away from underlying value.
Banks provide a clear example, with valuation metrics remaining elevated by historical and international standards despite rising competitive pressures and the potential for earnings downgrades. More broadly, similar patterns have been evident across individual stocks.
Our response is not to become shorter term, but to examine more carefully why a share price has moved and whether the evidence points to structural deterioration or over-extrapolation of near-term concerns. CSL and Cochlear were examples where large share price falls reflected genuine disappointments that required a reassessment of medium-term earnings power. By contrast, Brambles fell sharply after a downgrade driven by US repair-capacity constraints, while ASX fell after flagging higher technology investment. In both cases, the issues were real, but our assessment is that the market extrapolated them too aggressively given the competitive positions of both businesses.
Xero provides an example of this discipline working in the opposite direction. Xero had previously been a large overweight position in the portfolio, but we exited the stock during the September 2025 quarter following the announcement of the Melio acquisition. Our concern was
not simply the near-term earnings dilution, but what the transaction suggested about Xero’s strategic direction, capital allocation discipline and the durability of its competitive position as AI lowered barriers to software development. The stock subsequently fell materially, adding significant alpha relative to the benchmark. In a market reacting more violently to earnings revisions and perceived structural change, distinguishing between temporary disappointment and thesis impairment is becoming increasingly important.
Therefore, we believe the environment continues to create opportunities for patient investors. While short-term price movements remain volatile, valuation discipline and business quality remain the primary drivers of long-term returns. Our focus is therefore on identifying mispriced quality businesses, while remaining pragmatic in adjusting position sizes where our expectations differ from the market.
Conclusion
FY26 was a disappointing year for relative performance, driven by an unusually narrow market and a broad de-rating of high-quality businesses. While the outcome was challenging, the underlying drivers were identifiable and, in our view, cyclical rather than structural.
While market leadership will inevitably continue to evolve, our experience over more than two decades is that share prices and business quality eventually reconnect. Periods of unusually narrow market leadership have often created attractive opportunities for disciplined active investors, and in our view today’s market is increasingly presenting those opportunities.
Our objective remains unchanged: to identify high-quality businesses trading below their long-term intrinsic value and deliver superior returns for our clients over the full market cycle.
For more information, please contact us on 1300 927 254 or visit Our Funds.
The information in this document is published by Warakirri Asset Management Limited ABN 33 057 529 370 (Warakirri) AFSL 246782 and issued by Northcape Capital ABN 53 106 390 247 AFSL 281767 (Northcape) representing the Northcape’s view on a number of economic and market topics as at the date of this report. Any economic and market forecasts presented herein is for informational purposes as at the date of this report. There can be no assurance the forecast can be achieved. Furthermore, the information in this publication should only be used as general information and should not be taken as personal financial, economic, legal, accounting, or tax advice or recommendation as it does not take into account an individual’s objectives, personal financial situation or needs. You should form your own opinion on the information, and whether the information is suitable for your (or your clients) individual needs and aims as an investor. While the information in this publication has been prepared with all reasonable care, Warakirri and Northcape do not accept any responsibility or liability for any errors, omissions or misstatements however caused.
