Sam Heithersay
“The Australian market has proven its resilience through a volatile year to date. The enduring effects of the US-Iran conflict will present yet another test of this resilience. The Reserve Bank of Australia (RBA) was in the unique position of lifting rates to combat inflation before war broke out. Rising fuel costs and rates have already taken their toll on consumer and business sentiment but capacity utilization remains high and the labour market tight. Several companies have already reported rising expenses that cannot be absorbed, and consensus forecasts continue to indicate a hawkish stance from the RBA.
“Resources provides some ballast in the local market to help offset these swings in domestic consumer and business sentiment on resurgent inflation and rising rates. Global commodity demand remains robust underpinned by a healthy global capex cycle, notably the AI driven data centre build out. Energy insecurity will add impetus to global renewables build out and EV demand as well as the reconfiguration of global critical mineral supply chains already underway. Rising fuel costs could undermine these margin tailwinds but will be very unevenly distributed and history suggests that the sector in aggregate outperforms during inflationary periods.
“The first phase of AI disruption has disproportionately benefitted a narrow set of AI infrastructure enablers and foundational model pioneers to the detriment of markets like the ASX that have neither. But the next phase could see more diffusion and adoption of AI for operational transformation. We believe Australia is well placed to benefit from this AI diffusion, and our assessments of the ASX highlight meaningful differences in how companies are progressing in AI adoption. AI has the potential to reset long-held competitive advantages and we’ve drawn on historical parallel examples of disruptive technologies to conclude that companies who adapt and pivot rather than just defend their existing competitive moat make better long-term investments.”
Zara Lyons, portfolio manager, Fidelity International, comments: “Australian equities remain an attractive opportunity, though a selective approach is warranted given a macro backdrop that is still restrictive enough to prevent an indiscriminate re‑rating of the broader market. Elevated inflation, restrictive interest rates, geopolitical tensions, ongoing conflict and fiscal policy adjustments are contributing to weakening sentiment from consumers and businesses alike. Inflation has re-accelerated above the Reserve Bank of Australia’s target range, leading to expectations that interest rates could tighten further.
“This setup argues for staying focused on sectors with either structural growth, strong pricing power, or balance-sheet resilience, rather than relying on falling discount rates to do the heavy lifting. This is especially important in Australia, where the market is dominated by financials and resources, so performance is heavily influenced by what happens to banks, iron ore, and broader commodity pricing rather than by a balanced cross-section of the domestic economy.
“As we go deeper into 2026, sectors such as insurance, communications, healthcare, diversified financials and select consumer staples are expected to remain resilient or improve as the year progresses, benefiting from stable demand, pricing power and defensive characteristics.
“Over the longer term, Australia continues to benefit from strong structural advantages, including high standards of corporate governance, an attractive dividend yield relative to global peers and a large, low-cost natural resource base. These factors underpin a broad opportunity set capable of delivering attractive risk-adjusted returns over the cycle.
“Against this backdrop, a selective approach to Australian equities is warranted, with a focus on areas exposed to the country’s long‑term structural growth drivers and supported by bottom‑up fundamentals. The environment continues to favour companies with sustainable competitive advantages, strong management teams and resilient business models. As macro and monetary policy dynamics continue to evolve, attention is expected to remain on areas where improving end‑market conditions support earnings durability, alongside a disciplined approach to valuations.”
By Sam Heithersay, portfolio manager
