A Strong Start, Then a Reality Check
The year began on a solid footing, with markets continuing the rotation away from growth and into value. That shift supported performance through to February, particularly as investors leaned toward more defensive and income-generating assets. By March, however, sentiment turned quickly. Rising tensions in the Middle East and disruption to oil supply triggered a broad sell-off, with portfolios giving back around 2% over the period.
April Recovery – Led by the US
As we moved into April, markets began to stabilise. Much of the recovery was driven by the US, where oversold growth sectors rebounded strongly. The shift in sentiment was fairly clear—investors started to look through the short-term disruption and focus again on underlying economic strength. At the same time, countries more exposed to the oil shock, including Australia, didn’t keep pace.
Energy Costs and Inflation Pressures
The current environment is being shaped heavily by energy markets. Economies that rely on imported oil and related products—fertilisers, plastics and chemicals—are feeling the pressure more acutely, and Australia sits in that group. With no clear resolution between the US and Iran, it’s reasonable to expect these pressures to persist.
In practical terms, higher input costs tend to flow through to consumers over time. That keeps inflation elevated and reduces the likelihood of near-term rate cuts. If anything, it reinforces the idea that interest rates may stay higher for longer than previously expected.
Why Australia Is More Exposed
While parts of Asia are dealing with similar cost pressures, the impact isn’t as pronounced. Many of the larger APAC economies have deeper exposure to technology and manufacturing, which continue to benefit from global demand. Australia doesn’t have that same listed tech base, which makes it harder to offset rising costs elsewhere in the economy.
Taking all of this into account, we’ve moderated our outlook for Australia and expect it to lag relative to other regions over the remainder of the year.
Positioning Portfolios in This Environment
From a portfolio perspective, the focus has been on gradually shifting exposure toward economies that are less sensitive to energy costs and more aligned with long-term growth trends. That includes areas such as artificial intelligence, robotics and broader technology infrastructure.
This has naturally increased the appeal of the US. Compared to last year, it looks better positioned—both in terms of economic resilience and its role in driving global technology.
Property and REITs – Mixed Signals
Locally, higher interest rates are starting to weigh on property markets. Growth is likely to remain subdued, and we may also see further policy changes around investment property.
That said, rental demand remains strong, largely due to ongoing immigration, which provides some support underneath the market. At the same time, valuations in listed property (REITs) have adjusted to a point where they’re starting to look more attractive. We’re also seeing early signs of institutional capital returning to the sector.
Fixed Income – Better Value Emerging
Bond markets have had a difficult period as yields have moved higher, but that’s improved the long-term opportunity. Investment-grade bonds are now yielding above 6%, which is meaningful from an income perspective.
There’s still likely to be some volatility through 2026, but looking further ahead—into 2027 and 2028—the setup for fixed income looks more constructive as rate settings begin to stabilise.
Our Approach for the Year Ahead
We continue to favour value-oriented investments as a core part of portfolios. That positioning has helped cushion some of the larger drawdowns seen in higher-growth areas, private markets and rate-sensitive sectors.
At a broader level, we’re maintaining exposure to commodities and Asia, keeping a balanced allocation to Australia, and gradually increasing exposure to the US where the relative outlook is stronger.
Australia’s Broader Economic Picture
Australia is facing a more complex backdrop than many of its peers. Energy security remains an issue, and productivity growth has been relatively weak. At the same time, government spending and strong population growth are helping support overall activity.
This creates a somewhat uneven environment—where the economy avoids a sharp downturn, but still contends with higher interest rates and slower underlying growth.
Looking Further Ahead
Despite these challenges, Australia still benefits from its resource base. As global supply chains continue to shift, particularly with a focus on security and reliability, that should remain an advantage over time.
While 2026 is shaping up to be a more difficult and volatile year, the longer-term outlook remains constructive. The expectation is that the economy works through these pressures and is in a better position structurally from 2027 onwards.
Final Thoughts
Periods like this tend to test investor confidence, but they’re also a normal part of market cycles. Staying disciplined, keeping portfolios diversified, and making measured adjustments where needed remains the most effective approach.
