Sebastian Mullins
As global markets reach the midpoint of 2025, a complex and uncertain macroeconomic landscape is fuelling volatility fatigue, according to Schroders, in a new outlook released last week.
The outlook suggests that investors are increasingly ignoring the ongoing geopolitical risk, economic volatility, and policy uncertainty, and instead are choosing to look to fundamentals in an environment where stretched valuations, policy divergence, and asset price inflation dominate the narrative.
Global macro: markets muddle through murky fundamentals
Despite headlines dominated by trade tensions, inflation divergence, and geopolitical uncertainty, global markets have shown remarkable resilience. The current rally has occurred largely without excess sentiment or broad participation, pointing instead to a defensive reweighting toward neutral positioning, says Sebastian Mullins, head of multi-asset & fixed income at Schroders.
While ceasefires and tentative trade agreements have eased some short-term concerns, structural issues remain. Sluggish global growth, fiscal stimulus without productivity reform, and an embattled US Federal Reserve all contribute to a highly uncertain outlook. Inflation remains contained for now, but the potential for fiscal-driven yield curve steepening is growing, particularly in the US.
“Markets are no longer reacting sharply to geopolitical developments, they’re fatigued,” said Mr Mullins. “This leaves us uncomfortably neutral across all asset classes, as valuations remained stretched and expected returns remain muted. But the cycle remains intact, albeit uncomfortably slowing.”
Australian macro: short-term strength, long-term questions
In Australia, the macro backdrop remains stable and supportive in the short term. Inflation is moderating towards the Reserve Bank of Australia’s (RBA) target, and growth remains resilient (though private sector activity is weak), despite the RBA holding interest rates this month.
The upcoming August reporting season is anticipated to provide further insights into corporate performance and expectations for the year ahead. However, questions remain about the sustainability of these dynamics.
“Australia, like much of the developed world, is grappling with stagnating productivity growth and GDP per capita,” said Martin Conlon, head of Australian equities.
“Fiscal imbalances are obvious, with governments showing little intention of aligning spending with tax revenues. While equity markets benefit from their relative size and liquidity, bond markets become volatile. We’ve seen the gap between earnings yields and bond yields reach concerning levels – this reflects a market environment where asset prices are increasingly detached from economic reality.
“Asset prices continue to outpace wage growth, leading to increased wealth for asset owners and a widening divide with the rest of the population. The Australian economy is heavily leveraged, with property prices now four times the country’s GDP, raising concerns about affordability, resource misallocation, and long-term growth prospects. Lower interest rates are unlikely to stimulate productive investment, given capacity constraints in sectors like housing and infrastructure, and instead risk fuelling further asset price inflation,” added Mr Conlon.
Fixed income: a positive outlook for 2025
Yield curves are steepening globally, particularly in the US, as inflation approaches central bank targets and fiscal concerns grow. A potential change in leadership at the Federal Reserve could accelerate this trend, embedding a higher term premium in long-dated bonds.
“The Australian fixed income market has benefited from a stable macro environment, with strong demand for new issuance and average deal subscription levels around 3.8 times covered. Execution risk for new issuance remains very low, and the market is still catching up to Euro and US credit spreads. The July interest rate hold, subdued growth, and softening inflation underpin a positive outlook for fixed income performance through year end,” said Kellie Wood, head of fixed income.
Multi-asset: neutral positioning amid uncertainty
The stance in multi-asset is broadly neutral across all asset classes, reflecting stretched valuations and muted expected returns. While the economic cycle is slowing, it remains intact, and the persistent volatility and policy uncertainty make it difficult to take strong directional views. Globally, equity markets have rebounded sharply from earlier lows, with the S&P 500 rising over 25% from April to June despite ongoing geopolitical risks and muted investor sentiment.
“Most investors have only moved to neutral positioning, and excessive gains across asset classes are considered unlikely given the prevailing macro and policy uncertainty. Short-term volatility is expected to persist, and asset allocation decisions are likely to remain cautious, with investors wary of headline-driven moves and stretched valuations,” said Adam Kibble, portfolio manager.
Credit: strong demand for local securities
In Australia, the credit environment is characterised by healthy demand, solid corporate fundamentals, and a favourable technical backdrop. Corporate balance sheets are solid, with robust margins, especially among infrastructure and utility companies, which are favoured for transparent cash flows and low earnings volatility.
Activity in the subordinated corporate space is increasing, with recent hybrid and Tier 2 issuances. Since March, Tier 2 paper has underperformed senior debt, with some spread widening due to supply in late May and early June, but this was largely retraced as supply diminished and geopolitical tensions rose.
While the US credit market is becoming increasingly expensive and susceptible to volatility, Helen Mason, portfolio manager, believes that strong demand for Australian securities is expected to help mitigate some of this risk, especially with a projected decrease in Tier 2 supply in the second half of the year.
“The credit market has recovered, but the outlook is one of caution due to the potential for further market swings and an uncertain policy backdrop. Investors are advised to remain vigilant, as the environment is likely to remain volatile and sensitive to shifts in fiscal and monetary policy,” said Ms Mason.
Australian equities: fundamentals under pressure
Investors face a challenging environment where valuation discipline and a focus on fundamentals are increasingly difficult to maintain amid regulatory and market pressures, according to Mr Conlon.
“The Your Future Your Super regime and the rise of passive investing have redefined ‘risk’ as simply not holding enough of the largest index constituents, such as CBA. This has meant CBA being bought at ever-higher valuations, regardless of its fundamental value, exposing investors to almost certain loss.
“This distortion is not limited to CBA. The market’s obsession with businesses that employ minimal capital and promise rapid economic value creation, with little regard for business duration, is detached from economic reality and history. Companies have become skilled at offsetting current bad news with future optimism.
“The market’s fixation on revenue growth and momentum leaves opportunities in more mundane sectors, such as energy and materials, largely ignored, except for gold. We see abundant opportunity in these less fashionable corners of the market,” said Mr Conlon.
“We remain committed to a disciplined, risk-adjusted approach to value creation, even as market forces and policy settings make this increasingly uncomfortable. We will continue to seek out opportunities where the crowd is not looking, and to resist the pressure to follow the herd into overvalued territory,” added Mr Conlon.