Volatility is opening doors in Australian micro cap stocks

The Middle East conflict is showing tentative signs of easing. Oil has fallen around 20 per cent from its peak. But for Australian investors hoping inflation is about to roll over, Jack Briggs has a message: do not count on it.

Australia’s headline inflation is running at 4.2 per cent and is expected to peak at 4.8 per cent in the June quarter, remaining above the Reserve Bank of Australia’s target well into the foreseeable future.

For Briggs, portfolio manager of the Ellerston Australian Micro Cap Fund, that backdrop shapes how he thinks about Australian micro-cap stocks. It is not a reason to retreat. It is a reason to be very specific about where you are positioned.

“Higher inflation, or stagflation, creates a range of challenges and opportunities for local companies,” Briggs says.

Infrastructure and industrials are holding their ground

The fund’s top holdings reflect a clear conviction: businesses with pricing power, real-world demand, and infrastructure exposure are best placed to weather the current environment.

GenusPlus Group, Mayfield Group Holdings and Shape Australia Corporation rank among the fund’s five largest positions, alongside construction materials group Wagners, whose shares rose 30 per cent earlier this year following stronger-than-expected earnings and upgraded guidance.

Solid demand across cement, concrete and quarry operations and growing infrastructure activity in South East Queensland drove that result.

The standout performer for May was SKS Technologies Group, with its share price rising 36.2 per cent for the month after securing a $22 million contract for a major retailer’s new headquarters. Its work-in-hand figure now stands at $355 million, with FY27 secured revenue of $270 million, 35 per cent higher than where FY26 secured revenue stood at the start of July 2025. Its pipeline has expanded from $572 million in February 2026 to $1.25 billion by the start of May.

“We see SKS as a critical delivery partner for some of the major Australian hyperscale data centre providers, each with significantly increasing levels of pipeline to deliver on in the coming years,” Briggs says.

Volatility is creating entry points

Not every holding moved in the right direction. Acusensus, a road safety enforcement technology company, fell 11.9 per cent in May despite a broadly positive trading update, including two new operational programs in the UK and record sales pipeline growth in the US.

Transport for NSW also issued a six-plus-six-month extension on its mobile speed camera contract from 1 July 2026. Briggs is not moving.

“While there has perhaps been a lack of material catalysts for the last few months, we hold the view that there is still significant upside here on the back of market-leading technology,” he says.

That patience is part of a broader philosophy.

“Inflation-linked volatility has enabled us to identify and buy stocks we like at better prices, where fundamentals remain strong but share prices have fallen due to sentiment.”

Capital markets have remained selectively open. The IPO of SkinKandy and capital raisings by NextDC and CDC during May underscored continued appetite for AI and data centre-related investment themes, even in a challenging macro environment.

Healthcare is back on the radar

One of the more telling shifts in Briggs’ thinking is his renewed interest in healthcare, a sector he sees as increasingly attractive within the Australian micro-cap universe. It endured a difficult five years, with Covid-19 followed by inflation, rising wages, and reduced patient volumes. He believes the worst is now behind it.

“Over the last 12 months healthcare has come back on our radar. We like the ageing population thematic, which is driving high single-digit industry revenue growth for both diagnostic imaging and aged care. These themes continue whether there is inflation or not. Though we still think investors need to be selective,” Briggs says.

Australian micro-cap stocks: what the numbers say

The Ellerston Australian Micro Cap Fund delivered a net return of 4.7 per cent in May against the S&P/ASX Small Ordinaries Accumulation Index return of 2 per cent.

Since inception in April 2017, the fund has returned 16 per cent per annum net, compared with 7.2 per cent for the benchmark.

For advisers reviewing client exposure in an inflation-driven market, the fund’s approach is worth a closer look. Pricing power, strong balance sheets, and sustainable growth drivers are the filter. In an environment where those qualities are scarce, knowing where to find them is half the work.