EXECUTIVE SUMMARY
- 2025 was a rewarding year for investors, with all major asset classes posting gains.
- Markets adapted to shifting politics, as Donald Trump began a second US presidential term.
- Economic momentum remains solid into 2026, though high US valuations and equity market concentration warrant caution.
- The RBA raised interest rates in early February, reversing last year’s easing trend and reminding investors that inflation pressures persist.
- A broad-based commodity rally is boosting the outlook for Australian equities.
MARKET SUMMARY
Welcome to 2026! We hope the New Year has started well for you.
Risk-on sentiment fuelled an “everything rally” in 2025, marking the first year since the pandemic that all major asset classes delivered positive returns.
The year also brought a notable shift in the global landscape, as President Trump returned to the White House and reignited his “America First” agenda.
With geopolitics, trade policy, interest rates and minerals security back in the spotlight, 2026 promises to be another eventful year in markets.
Geopolitics
The year featured Middle East conflict and later peace, US action in Venezuela and debate over Trump’s Greenland ambitions.
As the US turns inwards, Europe is being forced to assume more responsibility for its own security. NATO aims to increase defence spending from ~2.5% of GDP to 5% by 2035. Germany is committing hundreds of billions of euros towards defence, infrastructure and climate initiatives. All of this is supportive of growth.
China is again the focus of Trump’s tariff offensive, but the impact has been limited as it diversifies exports to new markets and finds alternative routes into the US.
Australia continues to navigate an increasingly complex geopolitical landscape, balancing the priorities of its key security ally with those of its largest trading partner.
Trade, Economics & Interest Rates
Trump’s 2nd April “Liberation Day” tariffs briefly rattled markets and heightened recession fears, but sentiment soon improved following trade deals with the EU, Japan and China.
In 2025, growth strengthened and inflation eased across many major developed economies.
In the US, easing inflation and a cooling labour market prompted the Federal Reserve to cut interest rates three times totalling 0.75%.
The Reserve Bank of Australia (RBA) followed suit, but its 0.75% easing proved short-lived, with rates rising again in February 2026 as inflationary pressures intensified.
Financial Markets
2025 proved to be a rewarding year for investors, across all asset classes.
Europe and Japan led developed-market gains, while US stocks lagged.
Geopolitical developments also drove pockets of outperformance, such as in the critical minerals space. The rare earths and lithium sectors benefited as the US Government took steps to secure critical-minerals supply chains through strategic investments in US-based MP Materials and Lithium Americas.
Emerging markets delivered strong overall gains, as a rally in Chinese equities more than offset weaker performance in India.
Global infrastructure and Global and Australian property also produced solid returns.
Defensive assets tracked close to long-term averages, with Australian investment-grade bonds returning 3-5% and cash returning near 4%.
Gold outperformed all major asset classes, surging +55%.
2026 Outlook
As 2026 gets underway, valuations across many major regions remain reasonable compared with historical levels.
The US market is an outlier, trading at a premium on optimism around Big Tech’s earnings prospects and their outsized influence on major US indices. The key question for 2026 is whether their heavy AI investment will start to deliver the earnings growth current valuations expect.
Rising commodities prices improve the earnings outlook for Australian resources companies – which represent more than a quarter of the market.
Emerging markets provide additional regional diversification, through different growth cycles and typically lower valuations than their developed market peers.
We also continue to favour listed global infrastructure and property, which offer exposure to scarce, real assets supported by pricing power and rising replacement costs.
In 2025, investors increasingly questioned what “money” is, with some shifting from fiat assets (bonds, currencies) toward tangible stores of value like gold amid rising concern over government debt and lingering inflation risks.
The key issue now is whether traditional defensives such as bonds can still offer attractive risk-adjusted returns and meaningful diversification. We’ll be examining this closely in early 2026 to help ensure portfolios remain well positioned for the evolving environment.
MACRO UPDATE
RBA hikes rates, signals more may be on the horizon.
- On 3rd February, the Reserve Bank of Australia lifted the cash rate by 0.25% to 3.85%.
- This was the first-rate hike since November 2023 and makes the RBA the first major central bank (outside of Japan) to raise interest rates because their economy is running too hot.
- The accompanying statement noted that “a wide range of data over recent months have confirmed that inflationary pressures picked up materially in the second half of 2025”.
- Indeed, core inflation rose back to 3.3% in December, above the RBA’s target band of 2% to 3%. It is expected to run even hotter throughout Q1 2026 given the strength of demand in the economy and capacity constraints.
- The tone of the RBA’s statement left the door open for additional rate hikes in the coming months, “The Board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target”.
- Bond markets were largely prepared for the news, having repriced towards a higher-for-longer rate path over the past 6 months.
- For investors, higher rates are a double-edged sword.
- They tend to pressure company earnings (particularly in more rate-sensitive and discretionary sectors) and valuations, while generally improving the return and defensive appeal of cash and high-quality bonds.
What’s hot and what’s not in commodities (initially published in December 2025).
- Gold and precious metals have been standout performers this year amid ongoing macro and geopolitical uncertainty.
- Governments across the West—particularly the US—have ramped up fiscal spending, fuelling large deficits and swelling debt levels.
- This “run it hot” policy approach suggests inflationary pressures are likely to linger.
- In this environment, traditional assets like currencies and bonds are less attractive, while investors have turned to real, finite stores of value such as gold.
- Central banks have also been major buyers, boosting their gold holdings since the Russia–Ukraine conflict, both to diversify away from vulnerable currencies and to strengthen financial resilience against sanctions risks.
- Across the broader commodities landscape there are further encouraging signs.
- Copper, lithium, and tin have all delivered strong gains over the past year, reflecting resilient demand for key transition and technology metals.
- Iron ore and LNG—Australia’s top two exports by value—have held steady, remaining at highly profitable levels for the major miners (BHP, Rio Tinto, Fortescue) and energy producers (Woodside, Santos).
- Oil and thermal coal may be out of favour right now, but both continue to underpin global energy supply and are unlikely to disappear from the mix any time soon. Reliable energy remains critical to the onshoring of US manufacturing and to powering the rapid growth of AI-driven data centres.
- Nickel remains under pressure, with Indonesian oversupply weighing heavily on prices and forcing several WA miners to suspend operations.
- Yet, as lithium’s rebound recently demonstrated, even a modest shift in sentiment can spark a sharp recovery in price.
- For investors seeking diversified exposure to Australia’s resources and energy sectors, we view the VanEck Australian Resources ETF (ASX: MVR) as the most effective way to gain broad exposure in a single trade.
ASSET CLASS PERFORMANCE
Australian Equities
- The Australian equity market opened 2026 on a firm footing, with the S&P/ASX 200 Index rising +1.78% in January.
- Resources stocks powered the gains, as Energy (+10.6%) and Materials (+9.5%) rallied on the back of higher oil prices and stronger precious and base metals markets.
- Standout names included Lynas +19.8%, Evolution Mining +16.0%, Santos +13.6% and BHP +11.2%.
- At the other end of the spectrum, the Technology sector fell a further -9.43%, extending its losing streak to 7 months as stretched valuations and softer growth prospects continued to weigh on sentiment.
- Investor focus now turns to February’s reporting season, which will provide a crucial read-through on the health of Australian corporates and the durability of earnings growth in 2026.
International Equities
- Global equities extended their winning run into a tenth consecutive month, with the MSCI All-World Index advancing +2.24% in January.
- The US Q4 2025 earnings season has been encouraging, with both revenues and profits generally meeting or beating analyst forecasts and helping underpin risk appetite.
- Notably, the US small cap Russell 2000 index jumped +5.4% in January, outpacing the major large cap benchmarks (Dow Jones +1.80%, S&P 500 +1.45%, Nasdaq +0.97%) and signalling a healthier, more broad-based rally.
- European (+4.58%), Japanese (+6.13%) and Emerging markets (+5.63%) also posted solid gains, supported by improving growth expectations, upgraded 2026 earnings forecasts and a softer US dollar (returns in US dollar terms).
Property and Infrastructure
- Listed real assets also participated in the risk-on tone. Global Property gained +3.89% and Global Infrastructure (+4.02%), helped by a more supportive US interest rate outlook, undemanding valuations and strong structural tailwinds from AI, digital infrastructure and the energy transition.
- Closer to home, Australian Property lagged, declining -2.66% as expectations of higher domestic interest rates weighed on both the earnings prospects and asset valuations.
Fixed Income
- The Bloomberg Australian Bond Index added +0.21% in January.
- Floating -rate bond funds have continued to outperform their fixed-rate counterparts over the past 6 months, as markets adjusted to stronger domestic inflation data and a higher-for-longer interest rate outlook.
- Future rate hikes appear largely priced in. This creates a more appealing entry point for investors looking at moderate or longer-duration fixed-rate bond funds, which could benefit if yields steady or fall later this year.