Damien Hennessy

A rollover in the artificial intelligence (AI) trade, an interest rate pivot by the Reserve Bank of Australia (RBA) and a sustained rise in commodity prices are the three catalysts that could see Australian equities start to outperform global markets, Damien Hennessy, investment director and head of asset allocation at Zenith Investment Partners says.

While Hennessy doesn’t believe these catalysts are imminent, he says there is a chance they could come into play in 2027.

The first is that a reversal in the AI theme could lead an Australian rally. Hennessy estimates just 5 to 10 per cent of the Australian market is AI-related, which would leave local shares relatively insulated if the trade unwinds.

“The obvious catalyst would be that the AI theme rolls over and Australia becomes a place for investors to hide given it doesn’t have a large exposure to AI, aside from copper at the margins, compared to the US and emerging markets which is closer to 30 to 45 per cent exposed,” Hennessy says.

“If you’re still positive on that theme, global continues to be attractive. But if you’re wanting to diversify that risk, then Australia could be one of those markets where you can find diversification.”

The second catalyst is a shift in local monetary policy.

“The second potential driver of Australian equity outperformance would be an RBA pivot, and although I think it’s a little bit early for that, it may come in 2027,” Hennessy says.

“Historically, when the RBA cuts rates, it starts to provide support for the mid cap and small cap parts of the market, as long as you’re not cutting into a recession.”

The third catalyst is the resources sector.

“Australia has a 25 to 30 per cent exposure to materials and energy. If the market came to a view that resource prices and commodities were going to continue to rise, then Australia could benefit,” Hennessy says.

However, Hennessy doesn’t see any of these outcomes on the near-term horizon, and Zenith remains overweight global equities relative to domestic.

“There are three catalysts for a change, but I don’t see any of those on the near-term horizon. We’re still overweight global equities relative to domestic. That’s been a decision that we’ve had the last 18 months to two years,” Hennessy says.

Zenith maintains a constructive view on equities, though Hennessy says this depends on the AI theme delivering on earnings over the next one to three years. He also warns the lift in bond yields is effectively a tightening of financial conditions.

With bond yields above 5 per cent, Hennessy says bonds have moved into the fair value range after providing little return over the past five years.

“Bonds are not extremely cheap, but they’re no longer expensive. So that’s a positive for investors trying to construct portfolios,” Hennessy says.

“Investors are now getting 5 to 5.5 per cent for holding bonds, which means equities have to provide returns of 8 to 9 per cent for investors to be happy to hold that extra risk.

“We think the equity risk premium is now about 3.5 per cent in the case of the US. Equities do look expensive, but still attractive enough if you believe the earnings expectations that are built in.

“Over probably the last month, we’ve seen a number of more highly indebted issuers of debt or equities starting to come under pressure. So, I think there’s a bit of a move towards quality, and that’s not unusual at this stage of the cycle.

“The market is becoming a lot more discerning about quality and certainty over revenue streams and balance sheets.”

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“Capital once went where it was treated best. But now, it is starting to go where it is told,” Selby-Smith says. “For three decades, globalisation gave the world one large pool of cheap, mobile capital. That pool is now breaking apart. Countries are seeking to rebuild defence, secure energy independence and bring industry back onshore but this is costly, and the burden falls hardest on governments that are already heavily indebted.

“That money has to come from a finite pool of savings, which makes a fight for capital unavoidable.”

Selby-Smith says heavily indebted governments have few easy ways out. If they are unable or unwilling to grow their economies fast enough, cut their deficits or default, they are left to co-opt domestic savers, and one of the main tools available to them is financial repression.

Financial repression describes measures that channel domestic savings towards government priorities, such as encouraging or compelling savers to hold government bonds at very low or negative real yields.

Selby-Smith says versions of this are already playing out around the globe.

The UK’s Pension Schemes Act, passed in April, gives ministers a “backstop” power to compel pension funds to hold UK assets. Japan’s Finance Minister has urged households and the Government Pension Investment Fund, the world’s largest pension fund, to invest much more at home, while US Treasury Secretary Scott Bessent has described allied investment commitments as a US “sovereign wealth fund”. In Australia, there has been debate about whether superannuation funds should direct investments towards “nation building” initiatives such as affordable housing.

“The result of this is that capital becomes less free to move around the world in search of the best returns,” Selby-Smith says.

“Investors assume the choice of where their capital goes is theirs to make but once politics starts making that choice, even the most careful valuation may be irrelevant.”

Selby-Smith says France and the US, both among the world’s largest net debtors, are the most vulnerable major economies. Close to 60 per cent of French government debt is held by foreigners, and inside the eurozone, France has little room to respond.

“The US looks stronger, but it is still vulnerable. When savings are called home, American securities are the deepest pool to sell, because that is where so much of the world’s savings sit,” Selby-Smith says.

“Investors can be hit twice. The assets they are directed to own at home are likely to have unattractive real yields, and the forced sale of assets abroad may drive prices lower.”
In this environment, Talaria favours short duration, strong balance sheets, real assets and genuine diversification.

“Short duration is a liquidity choice as much as anything else. When savings are being directed, you want your capital back sooner,” Selby-Smith says.

“On government bonds, investors should hold as little as they dare, at the shortest duration they can justify.

“A company that can fund its own ambitions doesn’t have to compete with governments for capital, and it can invest when others can’t.”

Real assets have a better chance of keeping pace with inflation, although many remain vulnerable to taxation or regulation.

In addition, diversification is key.

“Most portfolios are far less diversified than they look. The share of global assets strongly correlated with the US market has risen from about a quarter thirty years ago to more than 90 per cent today,” Selby-Smith says.

“Genuine low correlation has become harder to find and increasingly resides in areas like volatility strategies and trend following.

“We’re not arguing financial repression is good policy. But when the political economy, not the market, is deciding where capital goes, investors need to be prepared for it.”

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Ben Davis

FinCap, the private markets investment platform, says some of the market conditions that produced the strongest private fund vintages of the past 25 years have returned, and recommends that investors build their allocations in stages across 2027- 2028 rather than wait for sentiment to recover.

“According to our research, investors should begin diversifying portfolios now through to 2028 across private equity, real estate, infrastructure and credit, with a tilt towards mid sized companies and discounted secondary stakes and limited exposure to segments where capital is most crowded,” says Ben Davis, head of portfolio and investment solutions, FinCap.

“The best time to buy private assets is when few others are buying, and that time is now,” Davis adds. “Exits are slow, fewer funds are raising money, and sellers who need cash are accepting lower prices. The herd mentality may be that private markets are not the place to be in 2027, but those same investors were fully invested in 2020 and 2021, when competition was intense and valuations were high.”

FinCap cites PitchBook data showing 551 US private equity funds closed in 2025, down from 836 in 2021. First time funds fell to 23 in the first half of 2026, compared with an average of about 180 a year from 2021 to 2023. Buyout funds have returned less than 15 per cent of their net asset value (NAV) to investors in each of the past four years, leaving owners who need liquidity to sell to the few buyers with capital.

Historical vintage data supports the case for investing after a reset. Real estate funds that began investing at the 2005 to 2007 peak lost about 3 per cent a year; those that began after the global financial crisis returned about 19 per cent a year.

“We do not expect returns of that size to repeat. Private markets have grown from under US$1 trillion to more than US$17 trillion since 2000, and the entry prices of that era are not coming back,” Davis says. “This is not a call for a big one year return, but a case for investing steadily over three years, so that each year’s capital buys at that year’s prices and holding for the long term.”

FinCap also names three risks worth watching in 2027. “A sharper interest rate cycle signalled by rising inflation expectations, a recession that cuts earnings before entry prices adjust and exit markets staying closed for longer, could extend the time investors wait for distributions,” says Davis.

“Across the FinCap portfolios, private equity is the largest overweight, with a bias towards the mid market,” he says. “Smaller US companies sold for an average of 7.0 times earnings in the June quarter, compared with 12.5 times for the typical US buyout in 2025.

“We are also overweight real estate, tilted towards value add strategies.US commercial property is 12.8 per cent below its 2022 peak and office is a third below. According to Jefferies Global Secondary Market Review sellers of real estate fund stakes received 68 per cent of NAV in the first half of 2026, the lowest of any private asset class.”

“We remain selective in infrastructure,” Davis says. “The AI build out requires power and data networks, and the International Energy Agency expects data centre electricity use to roughly double by 2030. However, capital is crowding into value add infrastructure, which narrows the opportunity set.”

“In private credit, we favour opportunistic strategies over direct lending, where record inflows are chasing fewer loans,” he adds. “Australian listed credit trusts have traded at discounts of 10 to about 25 per cent to NAV in 2026, and the main US business development company (BDC) index yielded 10.8 per cent at the end of September.”

“We are underweight venture capital as late stage valuations are high. We are taking exposure through secondaries and co investment,” Davis says.

“Active management will continue to play a role in selecting quality private assets. In the 2010s, cheap debt and rising prices were creating new opportunities for investors. Bain & Company now estimates a buyout needs 10 to 12 per cent annual earnings growth to return 2.5 times over five years, up from about 5 per cent. The managers who achieve that, do so by improving the businesses they own.

“Across FinCap’s Helm Portfolios we set a long term mix for each portfolio, adjusted within a range each quarter as prices move, and select the managers who deploy each position. BCA Research advises on asset allocation; the positions and manager selection are based on our own investment research,” Davis says.

Helm Growth holds 53 per cent in private equity, concentrated in mid-sized companies, secondaries and co-investment. It also holds 15 per cent in infrastructure (after adding two funds in September and October), 14 per cent in real estate and 8 per cent in venture capital.

Helm Income draws its returns mainly from credit. It holds about 16 per cent in flexible and opportunistic credit, including Australian listed credit trusts and a fund that invests in US listed BDCs, alongside 10 per cent in real estate and 9 per cent in infrastructure.

“As we head into the new year, no single market or manager should decide the return outcome for private market investments,” Davis says. “Private equity is the clearest opportunity, but real estate, infrastructure and private credit each respond to different drivers, from company earnings to rents, inflation and interest rates. Holding all four across high quality managers is how investors should build resilience into their portfolios.”

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Philip Brown

Inflation keeps the RBA cautious, but the case for rate cuts is building

When the RBA meets at the November board meeting, there will be a new set of forecasts created that will likely include a higher forecast for the unemployment rate. The previous forecast was that the unemployment rate would slowly rise from 4.4% to 4.8% by end of 2028. The reality is that we’ve gone from 4.4% to 4.7% in only three months.

For bond markets, this means that the risk of an elongated Australian rate rise cycle is dropping. While the near-term may yet see a further RBA rate move, the previous expectations had been for a cash rate as high as 5.06% at the peak (pricing on 28 September for the cash rate to be 5.06% in August 2027). Now, following the unemployment data, the cash rate peak is expected to be 4.88% in May 2027. Importantly, this is still higher than the current cash rate of 4.60%. If there were to be a continuation of the current run of weak data then the market might come to the conclusion that the RBA will be actively cutting rates in 2027, rather than simply not raising them. In such a circumstance, there is plenty of scope for bond yields to fall much further from here.

The domestic threads are suggesting that the economy has an inflation problem, but that the RBA rate rises are largely working to slow the economy. Inflation hasn’t yet started to fall, but the changes in the labour market are clear. If this keeps up, the RBA might have to raise rates more, depending on the inflation data, but the chance of an elongated peak in the cash rate is falling. If the RBA does move to a cash rate of 4.85%, from the current 4.60%, then the trend of weakening in the labour market is only likely to intensify.

The impact of higher yields on bond returns and bond portfolio selection

The recent sell-off in bonds has taken bond yields much higher. Unusually, this sell-off has been led by the longer end of the curve at times. Overall, this has seen the longer end of the curve rise by more than it normally would at this stage of a cycle. This is particularly true of the longer bonds in the 7Y sector and longer.

For bond owners, higher yields can improve prospective returns, particularly for new purchases. More return is always better, all else equal. But in bonds, there are a few unusual and complicated features that mean some bond investors don’t appreciate just how beneficial higher yields are. Higher yields are not better than lower yields in a linear way; higher yields are better than lower yields in an exponential way.

Investors confident that yields are about to turn lower, and those who have longer investment horizons might want to consider bonds in the 10Y zone. Those who are a little more cautious should probably consider shorter bonds in the 5Y-7Y range.

Government debt and AI emerge as key credit risks

There are numerous headlines about rising credit risk in government debt, but it’s not always easy to disentangle what is credit risk from what is simply supply and demand moving yields higher. We believe that the moves higher in the US yields are mostly about supply and demand for capital, rather than a true market reaction to increasing sovereign default risk. Fiscal pressures have increased the vulnerability of some sovereign borrowers to adverse market developments.

Unusually compared to other parts of the globe, Australia’s budget forecasts tend to be conservative, with low commodity prices and strong reversion to the mean. A result of that conservatism is that the net debt forecasts almost always have a slight upward tilt. Every Budget since 2019/20 has forecast rising net debt to GDP growth at a rate equal to or greater than current forecasts, yet the ratio has not risen as anticipated. At present, Australia is in the middle of the pack, but the troublesome names are the US, France, Japan and the UK.

The cancellation of IPOs in the AI space in Australia has been one manifestation of the risk that the AI boom is overdone, but it’s not the only one. The equity prices of some of the larger companies in the US have been falling too.

It’s important to differentiate between AI as a technology and the current AI technology leaders. While AI is a phenomenal tool, it is far from clear how best to use that tool in a commercial and profitable way. The companies that figure that out, and the AI providers that provide the AI best tailored to that end, will be the final successes.

While risks may be concentrated in the AI-linked spaces, there will be spillovers everywhere in the event of a large credit spread widening. But at the same time, it can be hard to know when that cycle will start. If you hunker down too early, you can miss a lot of extra yield by holding too conservative a position too early. Investment is not usually about the complete avoidance of risk; it is about taking considered and appropriate levels of risk in an informed way.

In this environment, shorter-dated credit may help manage exposure to widening spreads while retaining some exposure to credit risk. Although we expect a widening in credit spreads in coming months, we do not expect there will be a widespread rash of defaults. In this circumstance, shorter credit duration may mitigate price sensitivity, although issuer credit quality remains critical.

A longer bond that experiences a widening in credit spreads may remain below its previous price for an extended period. A shorter bond that offers the same initial yield will both fall by a smaller amount in a credit widening and be pulled back to par more quickly over time. Australian-based credits which are not particularly exposed to AI risk, but are of shorter tenor and floating rate, appear to be the best credit options, at present. 

Positioning for the next phase of the bond market cycle

We believe we’re approaching the end of the current cycle and the time is right to start thinking about what bond positions will be best for when the cycle actually turns. A turn in the cycle likely comes with a reduction in overall yields, but a widening in credit spreads. Notably, we don’t anticipate widespread defaults; we expect it is more likely that there will be widening in spreads without a material run of losses.

A balanced approach could include having lower credit duration but longer outright duration means selecting credit bonds that are comparatively short, but comparatively high yielding and then pairing these with longer, safer bonds.

Inflation-linked bond exposure may provide some protection against an unexpected rise in inflation. The risk of a material rise in the inflation rate, even amongst a general economic slowdown, remains high. It’s also important to focus on diversification.

By Philip Brown, Head of Research

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Tele-claims replaces traditional paperwork with compassionate, phone-based claim lodgement and support for those claims that are relatively straightforward. Members’ beneficiaries are guided through the process by a dedicated case manager from start to finish, with most delays now limited to cases where the fund has difficulty reaching the family.

Head of Member and Adviser Help Belinda Nicholson said: “Tele-claims can finalise straightforward claims for a member’s family in days rather than weeks. That can make an enormous difference at such a difficult time.”

Aware Super has also invested in a range of initiatives to improve the claims experience for all beneficiaries, including strengthening claims triage, simplifying documentation and processes, increasing proactive contact with beneficiaries and improved support for vulnerable claimants.

“While tele-claims is currently suitable for about 10 per cent of claims we receive, we are constantly looking for ways to simplify and streamline the claims process for all families,” Ms Nicholson said.

“And regardless of what sort of claim it is, every claimant is treated with care and compassion by our experienced team.”

Over the past year, Aware Super has paid $632 million in death and disability insurance claims to members and their beneficiaries, finalising 4,152 claims and paying an average $12 million a week.

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Alessia Berardi

US midterm elections will determine control of the House of Representatives and one-third of the Senate. All 435 House seats are up for election, along with 33 regular Senate seats. At present, Republicans control both chambers: the House stands at 220 Republicans to 215 Democrats, while the Senate stands at 53 Republicans, 45 Democrats, and 2 independents who caucus with Democrats. The chamber most likely to flip is the House, given the narrow margin, while the Senate is harder to change because only one-third of seats are contested at a time.

“Against this backdrop, the most likely outcome is divided government, with the House going to the Democrats and the Senate remaining Republican. A divided government would constrain Trump’s policy options at home,” according to Alessia Berardi, Head of Global Macro Economics and Emerging Markets Strategy, at the Amundi Investment Institute.

“Historically, when presidents are faced with this, they tend to focus more on foreign policy. Therefore, the US will likely become more interventionist. Recent polling also suggests that the elections may be shaped by more than normal partisan competition, with concerns about democratic backsliding, such as attempts to sway turnout or intimidate voters, which would further erode trust in US institutions and add to political uncertainty.”

Macroeconomic implications

The macroeconomic consequences of the midterms are likely to be limited by the balance of power in Congress, and therefore by the degree of fiscal gridlock. Under the most likely scenario of divided government, the main implication is that it becomes harder to pass large new fiscal packages, including additional tax cuts.

Existing tax legislation would largely remain in place, but the political room for fresh stimulus or broad-based tax reform would be limited. As a result, the fiscal stance is likely to remain broadly neutral to mildly restrictive over time, with elevated deficits and debt still providing the underlying backdrop.

There are likely to be differences across the three scenarios, particularly in how legislation is used to support specific parts of the economy:

1. Consumers: supportive measures/redistribution. If the most likely outcome, divided government, prevails, there is little scope for additional tax cuts that would materially boost disposable income across household income groups. If Democrats gain more power, there may be more emphasis on redistribution, healthcare support, and benefits for lower-income households, which could support consumption at the margin but would not necessarily boost consumption. By contrast, a Republican sweep would increase the probability of further tax cuts, which could be more supportive of spending and growth, but also more deficit-expanding. In all cases, the effect on consumption is likely to be indirect and modest relative to the broader macro cycle which is currently driven by the tech/AI-related capex story.
2. Capex cycle: the midterms could clearly affect investment conditions. We believe the expensing and bonus depreciation provisions introduced by the current administration and already in the tax code are likely to remain in place under a divided Congress, providing a meaningful support for capex. This should continue to favour eligible equipment, machinery and software, and help broaden the investment theme beyond Tech and AI to a wider range of business investments. On that basis, we expect the capex story to remain broadly intact. A split government would make fiscal deadlock the base case, increasing uncertainty around the policy environment, debt issuance and the term premium. The risk would be greater if it heightens the chance of shutdowns or debt-ceiling standoffs, and it could limit the scale of the capex cycle or expose weaknesses in the most vulnerable parts of the economy.
3. In the context of investments, an important channel is the impact on AI-related sectors, particularly through regulation and infrastructure buildout. While the political debate around AI may become more visible at the federal level, the practical effects are likely to be felt increasingly through state and local regulation, especially in areas such as zoning, permitting, electricity access, water use, and environmental rules. That matters because data centres are a key bottleneck in the AI investment cycle. A more restrictive regulatory environment could raise costs, lengthen project timelines, and affect utilities, infrastructure, and AI-linked capital expenditure. The effect would probably be more sector-specific than economy-wide, but it could still matter for investment intentions and market valuations. It is not possible, though, to draw a very clear line between midterm scenarios: the states most exposed to AI-related regulation and infrastructure pressures are increasingly revealing a partisan tension between Democrats, who tend to favour tighter guardrails, and Republicans, who tend to prioritise innovation and faster deployment. But the issue is not purely ideological: local concerns over electricity demand, water use, zoning, and the cost of data-centre buildout can drive regulatory pushback across party lines. Thus, while a Democratic sweep could make tighter regulation more likely, this would probably focus on areas such as consumer protection, labour impacts, environmental costs, energy consumption, and local permitting. Across the broader economy, given the geopolitical priorities of the current administration, we would expect continued emphasis on innovation, competitiveness, and faster infrastructure buildout in the race for AI dominance.
4. On inflation, the direct macro impact is likely to be very limited, but there could be some effects at the level of the inflation basket. In the event of a Democratic sweep with substantial majorities, an expansion or reintroduction of Obamacare-related subsidies would remain quite unlikely, as noted above. If Democrats nevertheless secured such measures, these could affect the healthcare-related components of CPI and PCE more noticeably, especially since medical care carries a meaningful weight in both baskets. This could introduce temporary shifts in inflation levels, although the effect is unlikely to be large enough to materially change the overall inflation trajectory in the medium term.

The most probable post midterm outcome is divided government, which would constrain legislative ambition at home while leaving the executive branch largely in control of the core policy agenda. The macro significance of that outcome lies mainly in fiscal deadlock rather than a major change in policy direction, with a higher risk of government shutdowns, more budget brinkmanship, and a higher policy uncertainty premium.

What could be the impact of the midterm elections on US assets and sectors?

The IT and energy sectors have been the strong outperformers since President Trump’s second election victory. Communication services and utilities have been the underperformers, and though part of this is due to the lower beta of the sectors in a rising market, these two are also the only sectors to have recorded a negative alpha over the period.

Will the winners of the first half of Donald Trump’s second term be the losers after the midterms? That is possible in certain sectors. Artificial Intelligence could face a tougher regulatory regime if Congress swings back to the Democrats, though the President has made clear his opposition to slowing down technology through regulation. We expect investment to continue, however, with technology being more of a driver than politics. This will support IT, and sectors like industrials and materials could benefit from a broadening in the investment trend.

The impact on the energy sector could be mixed. Opposition to renewable energy could wane if Democrats gain ground in Congress, potentially making renewables more competitive with fossil fuels. At the same time, a more interventionist US in case of a divided government could lead to prolonged tensions in the Middle East, keeping energy prices higher for longer.

Any change in direction for the energy sector would also be relevant also to utilities, given the negative correlation between the performance of the two sectors since the start of the second quarter this year.

Healthcare has suffered due to President Trump’s comments on drug prices, even though the President has complained more about foreign consumers paying too little, rather than domestic consumers paying too much. We think the sector could rebound as a result. A Democrat-dominated Congress could launch investigations into the healthcare insurance sector, however, given voters’ ire over this sector.

The performance of financials will depend on regulation, but also on the direction of bond yields and the cost of risk. Regulation is probably more in the hands of the Fed than of Congress, and the trend may not be affected by the midterm elections. Under a divided government, however, progress on reducing the deficit may be extremely halting. As a result, the yield curve could steepen, increasing net banking margins. It could also keep real growth strong and prevent an increase in the cost of risk, helping financials improve their performance relative to the rest of the market. By contrast, further increases in nominal interest rates are likely to continue to put pressure on the real estate sector.

Markets are pricing gridlock without relief

Pricing around the 2026 midterms does not simply reflect rising uncertainty – it reflects a repricing of the baseline. Divided government, the September consensus, has given way to a higher probability of a Democratic sweep. Markets are not just more nervous; they are starting to price a different political world.

That shift has a political logic. The macro backdrop remains supportive: orderly markets, resilient growth, and a growing wealth effect. But the factors that decide midterms – purchasing power, gasoline prices, household sentiment and approval among swing voters – have not improved, and the Iran conflict has compounded these pressures. Trump’s political capital looks fine in aggregate, but it is weak precisely where elections are won.

A Democratic House is now close to fully priced. While prediction markets increasingly favour a Democratic sweep, our central scenario remains a divided congress, reflecting our assessment of the electoral map and the remaining uncertainty round the Senate races. A Democratic Senate would control judicial and Fed confirmations, constraining the White House in ways that go well beyond committee subpoenas.

Political and policy baskets complete the picture

Republican policy exposure has weakened dramatically, but assets sensitive to a Democratic agenda are not rallying either. Instead, markets are converging on a simpler view: whoever wins, ambitious policy is off the table. Markets already price constrained fiscal ambition, moderate trade tension and continued immigration enforcement through executive authority.

Uncertainty is also visible in the options market. Implied equity volatility for the post-election expiry has risen sharply above that for the pre-election expiry, signalling a prolonged period of policy digestion after the vote.

Rising rates complicate the picture, raising the cost of fiscal confrontation. Shutdowns, debt-ceiling brinkmanship, and budget gridlock under a Democratic Congress are greater risks. In prior cycles, gridlock was a relief trade. At current yield levels, it may not be.

The larger post-election question is whether a constrained White House responds with moderation or turns to executive tools – tariffs, China policy, immigration, Fed pressure – more aggressively than markets currently assume. That is the risk not yet in the price.

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Simone Haslinger

The latest ECCM State of Trend report presents a broader view of the market. It shows that though traditional assets were roughly flat in Q3, due to a September sell-off on rising bond yields and oil prices gave back earlier gains, trend following strategies benefited from diversified exposures, outperforming traditional asset classes.

Interestingly Grains and Oilseeds performed strongly through the quarter, led by Oats, Rice and Soybean Meal. Selected Food and Fibre markets also rallied, such as Sugar and Rubber.

Simone Haslinger, CEO of East Coast Capital Management (ECCM), says “Trend following has shown low correlation with ASX200 Total Return and Australian 60/40 indices over nearly 7 years. This provides diversification benefits that are complementary to traditional portfolios.”

This report covers the performance and role systematic trend funds have played over the past quarter, comparing them to Australian equities and a traditional 60/40 portfolio.

“Over the analysis period, the inclusion of trend following alongside a traditional portfolio of stocks or stocks and bonds markedly increased risk-adjusted returns, expanding the efficient frontier,” Haslinger says.Over the past 12 months, the report finds trend systems returned 20% to 21%, well ahead of the 1% to 3% from traditional assets.

The report also models what happens when you add the ECCM Systematic Trend Fund to a traditional portfolio, using hypothetical portfolios based on actual fund and index returns since January 2020, rebalanced monthly.

Blended with an Australian 60/40 portfolio: A 50/50 mix of a 60/40 portfolio and the Fund (after fees) returned 9.5% a year, against 5.2% for 60/40 alone. Maximum drawdown was -9.1%, against -16.2%.

Swapped in for part of an equity portfolio: Replacing 40% of equities with the Fund lifted returns to 10.8% a year from 8.0%, and cut volatility to 11.8% from 15.0%.

ECCM’s systematic trend following strategy trades over 90 international futures markets, spanning equity indices, short term interest rates, long term government bonds, currencies and commodities and is expected to show a low correlation with traditional investments, enabling investors to diversify a traditional portfolio of stocks, property and bonds.

Read the report.

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Denis Orrock

Australia’s high-net-worth (HNW) investors are optimistic about markets but keeping significant cash in reserve, as economic and policy uncertainty tempers their appetite to put capital fully to work.

Praemium and CoreData’s Rich Decisions research found 81% of HNW investors expect investment markets to perform well over the next 12 months. Yet 53% hold cash, making it the third most commonly held asset class behind Australian equities (57%) and residential property (54%). Among those holding cash, it accounts for an average 20% of their portfolio.

Caution keeps cash in reserve

The 2026–27 Federal Budget has added to the uncertainty, with 32% of investors saying they had increased, or planned to increase, their cash holdings as a result. Interest rate changes remain the leading portfolio concern (48%), followed closely by inflation (45%) and the risk of a global economic slowdown (44%). Financial policy and tax changes are also weighing on investors (42%).

Yet the cash allocation doesn’t suggest investors have stopped making decisions. Almost two-thirds (64%) changed their portfolio allocation over the past 12 months. While 18% moved to a more defensive position and 8% became more aggressive, 37% did both, reducing risk in some parts of their portfolios while taking up opportunities elsewhere.

Where investors see opportunity

Technology may be one destination for that capital. AI and technology topped the list of opportunities, nominated by 46% of investors, ahead of interest rate cuts (39%). Domestic and international equities were each identified by 36%, while 31% saw opportunity in private markets and alternatives.

“Cash isn’t necessarily a vote against growth,” said Denis Orrock, Acting CEO at Praemium. “HNW investors can see opportunities in technology, equities and private markets, but they’re also navigating interest rates, inflation and policy uncertainty. Cash gives them the flexibility to act when the right opportunity emerges.”

Uncertainty driving demand for advice

For advisers, the opportunity lies in helping clients determine when to deploy that capital and where. Alternatives illustrate the challenge: while 26% of HNW investors already hold alternative investments, another 22% want access, or greater access, but find it difficult to obtain.

That uncertainty is also driving demand for advice. Since the Budget, 29% of investors have sought, or plan to seek, additional professional advice, while 28% of advised investors want more support accessing alternative investments.

“The question isn’t simply whether investors are holding too much cash, but what would give them confidence to deploy it,” Orrock said. “For advisers, that creates a broader portfolio conversation around liquidity, diversification and how new opportunities fit alongside existing holdings.”

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Maroun Younes

The foundation of the global equity bull market remains earnings growth. Corporate profitability has continued to expand and forward earnings expectations remain supportive across major markets. Importantly, a significant portion of recent equity appreciation has been accompanied by rising earnings rather than being driven exclusively by multiple expansion. As long as profits continue to compound, equities retain a fundamental anchor. The principal risk would therefore be a transition from slowing earnings growth to outright earnings deterioration; there is little evidence of that at present.

The most important structural engine behind that earnings strength is AI and the increasingly broad physical ecosystem required to support it. This is no longer simply a semiconductor or software story. The build-out encompasses data centres, electrical generation and transmission, cooling systems, networking equipment, industrial infrastructure and the enormous quantities of capital required to finance them. AI investment has therefore become both an important contributor to corporate earnings and a meaningful source of real economic activity.

The complication is inflation. Price pressures remain above central-bank objectives across much of the developed world, while higher energy prices, persistent fiscal deficits and elevated sovereign borrowing requirements all threaten to keep the nominal environment firmer than markets became accustomed to during the post-GFC era. Meanwhile, the sheer scale of AI-related investment is intensifying demand for electricity, infrastructure, equipment and capital.

This makes interest rates the key macroeconomic risk to the bull market. Equities can perform well alongside elevated yields when nominal growth and earnings are sufficiently strong. The danger comes when restrictive rates begin to impair economic activity, weaken profits, increase refinancing stress and widen credit spreads. On that measure, the warning lights are not yet flashing red. US high-yield spreads remain consistent with relatively contained aggregate credit stress, while earnings expectations remain positive.

A second vulnerability is narrow market leadership. Recent index gains have increasingly depended on a relatively small group of large companies, while participation underneath the headline indices has deteriorated. Historically, weakening breadth has often accompanied mature bull markets and major market peaks, making broader participation desirable for the durability of the advance.

The bull market should therefore be regarded as maturing and displaying several late-cycle characteristics. Elevated concentration, greater sensitivity to bond yields, geopolitical and inflation uncertainty, and increasing dispersion between winners and losers all argue for more volatility and a less forgiving investment environment.

The resulting investment regime is best described as constructive, but not indiscriminate. Equities can continue to perform while earnings remain supportive, but investors should expect greater volatility and choppier index-level returns as the cycle matures. In this environment, generating returns is likely to become less about broad market exposure and more about identifying businesses capable of delivering through a mixed macroeconomic backdrop. As the macro picture becomes less clear-cut, investors can no longer rely on economic tailwinds alone and should increasingly favour companies with demonstrable earnings delivery, strong free cash flow generation and robust balance sheets.

We remain constructive on AI, particularly given the absence of any meaningful slowdown in associated activity. However, the market has become far more selective and is demanding greater certainty around funding, profitability and execution. The phase where virtually any AI-related exposure was rewarded appears to have passed. Importantly, the opportunity set extends well beyond semiconductors and software. The AI investment cycle continues to drive demand across power generation, grid infrastructure, industrial equipment, data-centre construction, cooling systems and financing, creating attractive opportunities throughout the broader value chain, often at more reasonable valuations than the most crowded areas of the market.

At the same time, we are finding opportunities in areas that have been categorised as potential AI losers. In some cases, concerns around disruption are justified. In others, the market may be overstating the threat or underestimating the capacity of high-quality businesses to adapt and innovate. Not all business models will be impacted equally, and periods of disruption often create valuation dislocations that can be exploited selectively. Maintaining exposure to AI does not preclude identifying opportunities among businesses that the market may have prematurely written off.

More broadly, we see increasing value in idiosyncratic opportunities where businesses can create shareholder value through company-specific drivers rather than simply benefiting from favourable macroeconomic conditions. Spin-offs, under-researched companies, businesses with strong balance sheets and attractive free cash flow characteristics, and companies benefiting from long-term structural themes can all offer compelling return potential independent of the broader economic cycle. This reinforces the importance of disciplined stock selection as markets become more differentiated.

The critical signposts are now earnings breadth, market breadth, bond yields and credit spreads. So long as profits remain healthy and credit conditions remain orderly, the bull case survives. A deterioration across those indicators would represent a materially more serious warning that the cycle is approaching exhaustion. Until then, the regime remains constructive, but increasingly rewards selectivity, quality and disciplined stock picking over indiscriminate exposure.

By Maroun Younes, portfolio manager

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Where across the value chain will profits ultimately accrue?

After an exceptional AI-driven earnings cycle in 2026, the investment debate is shifting to the sustainability of returns, the durability of demand and the economics of AI. Are the returns sufficient given the investment required, and where across the value chain will profits ultimately accrue?

Global equities returned around 13% year to date to the end of September. While next-12-month consensus earnings estimates rose approximately 30%, the market multiple compressed from around 19 times to 16 times. Much of that earnings acceleration has been driven by the AI cycle.

The speed of change in market leadership illustrates just how non-linear the AI cycle has been. Micron, Samsung Electronics and SK Hynix have all moved into the top ten contributors to global index returns in 2026, yet some of these businesses were generating negative gross margins as recently as 2023. As a result, they would not have appeared in many conventional investment screens before their recent moves, leaving a number of equity strategies offside as the cycle turned. In our view, in a rapidly evolving market, the ability to identify inflection points, rather than simply extrapolate history, is increasingly valuable. This is an environment in which we believe fundamental research becomes more important, as detailed analyst insights can help identify those inflection points and challenge the assumptions embedded in market expectations.

An important component of the earnings-driven growth we’ve seen is that it has been driven in part by a transfer of cash from hyperscaler balance sheets and free cash flow into the earnings of AI hardware companies, particularly memory. The lower market multiple we now see suggests investors recognise that this balance sheet transfer is unlikely to be sustainable over the long term. The question from here is how durable those earnings prove to be and how sustainable the sources of funding behind them are.

We remain constructive on global equities into 2027, but the risks around earnings expectations are higher than they were a year ago. The market continues to expect above-cycle earnings growth, but interest rates are higher, inflation remains above target for many central banks, geopolitical uncertainty persists and US consumer sentiment is at multi-decade lows. At the same time, the largest companies are starting from a less flexible balance-sheet and free-cash-flow position following significant investment and greater use of both equity and debt markets.

We do not see those funding sources as exhausted, and importantly, the evidence on AI adoption remains positive. The next phase of the AI cycle, however, increasingly needs to be supported by monetisation. The market is watching recurring revenues at private AI companies and hyperscaler cloud growth, while companies more broadly are increasingly identifying new applications across areas including pharmaceutical and biotech research and cybersecurity. So far, the signals remain encouraging, but ultimately the scale of investment needs to be matched by growing adoption from enterprises and consumers.

As we move into 2027 and look for confirmation of the durability of earnings, the market is going to be looking for evidence about 2028. Many companies, particularly across the AI supply chain, have already sold their 2027 capacity, which means the potential for earnings beats on the scale seen in 2026 is lower. The more interesting question is therefore likely to be one ofduration: can companies demonstrate that this cycle extends into 2028 and beyond? Further evidence of that durability could support a rerating in valuations even if the rate of earnings-per-share growth begins to moderate for some of the current beneficiaries.

One of the other major investment questions is where the profits ultimately lie as the AI value chain evolves. We are looking across the whole market, including hardware, large language models, cloud providers, the industrial companies building data centres and providing their power and cooling, software, cybersecurity and the consultants helping enterprises build AI capabilities.

Technology delivery itself is also evolving because we keep crashing into the laws of physics. This is forcing a rethink of how data centres are constructed, with the move towards optical technology as one example. Solving those constraints is itself creating new investment opportunities.

At the same time, we do not think we are close to understanding all of AI’s use cases, and we have barely begun optimising the AI stack. Greater efficiency could ultimately change how much infrastructure is required.

Against this backdrop, managing investments through this dynamic environment comes back to balancing return and risk, while positioning for a range of potential outcomes. For instance, if the returns do not justify the spending, we would expect to see hyperscalers pull back on capital expenditure. In that case, they could experience a significant increase in free cash flow as they begin leveraging the investments already made. Highly leveraged neoclouds could face a much more difficult outcome. We are also asking where the credit exposure sits if the AI cycle were to unravel, and where capital would rotate in that scenario. This is one reason we continue to value attractive opportunities that are not dependent on AI.

By Rosie Malcolm, portfolio manager

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