Niamh Brodie-Machura

Key points

• 55 per cent of Fidelity analysts expect companies’ cost inflation to rise over the next 12 months as a result of the renewed Middle East conflict
• Analysts expect capital expenditure to increase, with the strongest expectations in utilities, energy and information technology
• Most analysts expect corporate profitability to remain resilient over the next 12 months despite higher expected cost

The resumption of hostilities in the Middle East has renewed concerns over inflation and supply chain disruption, but many businesses have yet to feel the full impact on their costs, according to Fidelity International’s latest Analyst Pulse Survey. 

The quarterly survey of almost 100 of Fidelity’s equity and fixed income analysts, conducted in June and informed by the team’s ongoing meetings with company management teams, found that 55 per cent expect inflationary pressures within the companies they cover to increase over the next 12 months as a result of the Middle East conflict.

While many businesses have so far been protected by energy hedging programmes and existing inventories, analysts believe higher energy, freight and raw material costs are likely to become more visible as those protections expire. Consumer, industrial and utilities companies are expected to experience the greatest increase in cost pressures, although analysts anticipate higher input costs across every sector and region.

Niamh Brodie-Machura, CIO, equities at Fidelity International, said: “The renewed conflict is adding to an already uncertain backdrop for businesses. While many companies have yet to feel the full impact on their cost base, our analysts expect inflationary pressures to become more apparent over the coming months as existing buffers begin to unwind. The extent to which companies can manage those pressures is likely to become an increasingly important differentiator.”

Sam Heithersay, portfolio manager, Fidelity International adds: “For Australia, the picture is one of broad resilience but rising dispersion. Australia remains relatively well placed as a net exporter of energy and commodities, which helps to support ongoing capital investment and cushions the economy at an aggregate level. But higher energy, freight and raw material costs will add to an already persistent domestic inflation backdrop, with greatest pressure likely to fall on domestically exposed companies that lack the pricing power to pass on costs without sacrificing margins or market share.”

Companies continue investing despite rising cost pressures

Despite this more challenging environment, analysts expect companies to continue increasing capital expenditure. Expectations are strongest in utilities, energy and information technology. These sectors are expected to play a central role in supporting continued investment in artificial intelligence (AI) infrastructure, from power generation and networks to semiconductors and data centres.

Analysts also expect corporate profitability to remain resilient over the next 12 months. Despite higher expected costs, more analysts expect profitability to improve than deteriorate, suggesting many companies remain well placed to manage inflationary pressures despite a more uncertain operating environment. 

Heithersay comments: “Corporate profitability in Australia should remain relatively resilient, underpinned by strong balance sheets and double-digit earnings growth at a market level. Recurring geopolitical disruption has made corporate resilience more than just a defensive attribute and increasingly a competitive advantage. The strongest companies will likely be those that can preserve margins through the current cost shock while maintaining the operational discipline and cost flexibility to absorb the next one.”

Brodie-Machura concludes: “Taken together, the survey highlights three themes shaping markets today: persistent inflation pressures, rising capital expenditure and resilient corporate profitability. While geopolitical uncertainty is creating new challenges, many businesses appear well placed to navigate them. For investors, identifying those companies that can continue investing while maintaining profitability will remain critical.”

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Source: Fidelity International Q2 Analyst Pulse Survey 2026. The quarterly survey was conducted in June 2026 and features 110 responses from 95 of Fidelity International’s equity and fixed income analysts covering global sectors and regions.

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Ario Emami Nejad

Despite the higher oil and commodity prices sparked by the Iran-US conflict, inflation in the US and globally is not expected to spiral out of control and we are not likely to see the same interest rate hiking cycle that was experienced in 2022, according to Ario Emami Najad, co-portfolio manager of the Fidelity Global Bond Fund.

“While we are likely to see a period of above target inflation, data from the US shows that the labour market is stabilising, and a sustained period of interest rate hikes is unlikely”. Equally “We don’t think the market is wrong by pricing in interest rate hikes in the future, but we don’t think we are in an environment similar to 2022 when we went down a path of sustained hiking cycle,” he says.

Emami Najad says it is unlikely that the Fed will issue more than two hikes this year, but suggests other central banks may hike more.

“Following last week’s 25bp hike by the European Central Bank, the market continues to expect another hike this year. However, if the oil price continues to remain high following the ceasefire, then we are likely to see more hikes in 2026. The Bank of England faces a similar scenario if high energy prices persist. It does not want to hike because of the risk to the UK economy. But if this conflict drags on for longer, the bank, against its own will, might be forced to increase rates.”

“The facts on the ground can change at any moment. The central banks which are looking to hike, might decide to hold off or cut rates if the situation turns on the unemployment front, so an active duration management approach is necessary for bond investments. We are in a higher for longer environment, but we are not in a higher forever environment.”

“In 2022, the central banks had to do a lot more to tackle the inflationary shocks that we were seeing across the world. Whereas today we are already starting at a high point, so much so that the shock that we are seeing is not really going to be as bad as it was in 2022,” he says.

With the market’s current equities euphoria, Emami Najad says that bonds still provide a good hedge against investment risk and should be included as a diversifier in a portfolio. “Investors underestimate the hedge that owning bonds still provides for their investment portfolios.”

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Sam Heithersay

As we head into the second half of 2026, Fidelity International believes fundamentals are relatively supportive of risk assets, despite a highly volatile backdrop. The conflict in the Middle East has reaffirmed that investors are navigating a fragmented world. Markets are starting to look through the short-term noise towards resilient fundamentals supporting asset performance through the rest of the year, while the AI capex cycle remains a powerful upward driver for markets across the globe.

At the same time, traditional safe havens may not play the same role as they used to. And diversification is expected to prove more important than ever.

Top conviction for the rest of 2026:

• Equity risk: We are constructive overall, particularly in Japan and select emerging markets. We remain mindful of the strong rally markets have seen since April.
• AI capex: It has been the driving force for global markets and is supporting other themes like energy scarcity and grid upgrades.
• Commodities: Boosted by geopolitical fragmentation and the AI capex cycle, commodities that are energy-linked may provide useful diversification for geopolitical risk when traditional assets such as duration and gold behave less reliably.

Navigating the second half of 2026

“Markets have proven impressively resilient against a volatile first six months of this year. But their steadfastness shouldn’t be surprising. They’ve become well-versed in seeing through the noise and recognising upside,” said Salman Ahmed, global head of macro and strategic asset allocation, Fidelity International. “Now is not a time to shy away from risk, only to ensure it’s balanced in a well-diversified portfolio that will cushion the inevitable shocks when they come. While recent diplomatic progress between the US and Iran may help ease some immediate concerns, uncertainty remains elevated and the path ahead is unlikely to be straightforward.

“The key macro variable for the near future is the energy supply shock caused by the closure of the Strait of Hormuz. Our base case has been a ‘messy resolution’ to the conflict. The proposed deal to reopen the Strait of Hormuz and extend the ceasefire, points towards de-escalation, however, there remains a meaningful range of possible outcomes. Markets are likely to continue pricing some geopolitical risk premium until a durable resolution becomes clearer. Higher inflation and tighter monetary policy will drag on growth across most regions; energy markets will maintain a persistent geopolitical risk premium.”

A constructive environment

Resilient fundamentals are supporting markets, despite geopolitically-induced volatility. Most significantly, US tech behemoths are continuing to pour billions into AI development that is driving continued earnings momentum. That immense capex spend is bolstering companies across the value chain, including the industrial enablers that support the building of data centres and rising energy needs. A wider set of US businesses are also starting to feel the impact of that AI-driven capex spend underpin earnings and improve productivity. This broadening effect across the market presents enticing entry points while attention is focused on a small number of high-valued tech names.

Matthew Quaife, global head of multi asset, at Fidelity International, comments: “The earnings story remains strong globally, driven in part by the AI capex story, but also due to resilient economies and the partial unwinding of trade tariffs. The AI trade and strong earnings are supporting US stocks, though parts of that market have already run a long way. Emerging markets (EM) remain a high conviction allocation. EM equities benefit from broader tailwinds like the AI cycle. A softer dollar and structurally improving policy credibility should also be positive drivers. However, the conflict in Iran is having a divergent impact across different parts of the EM universe. Those exporters of commodities in Latin America are benefitting; those that import energy, particularly Asian economies that are reliant on supply that passes through the Strait of Hormuz, are suffering.

“Other structural themes will persist elsewhere, with Europe still investing in its defence sector, for instance, as conflict continues and policymakers strive to localise defence supply chains. Similarly, there is renewed focus on improving energy resilience, resulting in further investment by the US and Europe in their ageing grids.”

Rethink safe havens

As the macro environment changes, there is a need to rethink diversification. Heightened geopolitical and fragmentation risks are putting a strain on traditional safe havens, which means investors can’t rely on a single asset to support riskier elements of their portfolio. The dollar, for instance, does not look as attractive for the long term as it once did, owing to less consistent US policymaking. Exposure to commodities should support portfolios, with inflation set to remain higher for longer, particularly those with energy exposure that can protect against geopolitical risk.

A changing playbook for Australian equities

Australian equities are navigating an increasingly complex macro backdrop. Inflation remains above the RBA’s target range, geopolitical tensions are disrupting supply chains and energy markets, and the path for interest rates is proving more uncertain than expected at the start of the year. While the domestic economy has held up relatively well, higher funding costs and weakening consumer momentum are creating a more uneven earnings environment.

At the same time, the foundations remain supportive. Employment is still robust, population growth continues to underpin activity, and Australia is well positioned as a strategic supplier of resources and energy in a more fragmented global economy.

Sam Heithersay, portfolio manager, comments: “An important shift is taking place cantered on market leadership. For much of the past decade, Australian equity returns have been dominated by banks and domestic yield exposures, supported by falling interest rates, stable regulation and a concentrated market structure. While banks still benefit from resilient asset quality and strong capital positions, the conditions that drove sustained outperformance are becoming less powerful.

“We believe the market is now entering a period where leadership is likely to broaden. Higher rates and slower credit growth are beginning to constrain parts of the domestic economy that benefited most from abundant liquidity. At the same time, elevated bank valuations leave less room for disappointment. This raises a critical question for investors: does leadership shift away from domestic financials towards areas more exposed to structural global themes?”

Structural drivers are gaining momentum

Sam Heithersay comments: “There are increasing signs that this transition may already be underway. A higher-for-longer rate environment makes it more difficult for expensive defensives and long-duration income exposures to sustain the valuation premiums seen in the post-GFC period. In contrast, areas leveraged to structural shifts including deglobalisation, supply-chain security, energy transition and AI-driven change — are becoming more influential drivers of returns.

“Energy is one clear expression of this shift. Higher prices continue to pressure consumers, reinforcing a preference for more defensive exposures over discretionary spending. However, at a national level, Australia remains a reliable supplier of LNG, coal and uranium into a world increasingly focused on supply security. This is supporting national income and parts of the earnings base despite softer domestic conditions.

“Importantly, a genuine shift in market leadership is unlikely to be defined by a short-term rotation into commodities alone. A more durable transition would require evidence that markets are increasingly rewarding structural earnings growth, supply scarcity and global positioning over domestic leverage and housing exposure.

“Rather than viewing sectors in isolation, the focus is increasingly on identifying businesses exposed to structural tailwinds that can persist across multiple economic cycles. As a result, Australian equities may become less driven by traditional domestic exposures and more influenced by global themes such as scarcity, technological change and economic realignment.”

AI continues to drive growth while reshaping valuations

James Abela, portfolio manager, comments: “Artificial intelligence (AI) and rising commodity prices are dominating the drivers of earnings and multiples in the Australian small- and mid-cap universe. AI’s impact is broadening, extending into business consulting, engineering, finance, business software, legal and healthcare industries. We expect productivity benefits to flow over time. The durability of existing software or service moats, franchise strength and the ability to stay ahead of AI-driven product innovation are becoming increasingly important considerations that we expect to come into sharper focus over the next few years.

“Capital investment into AI in 2026 is currently running towards US$1 trillion, up from US$260 billion in 2024. This not only highlights AI’s rapid growth but also its scale in the global technology landscape. Competition for leadership is driving significant flow-on effects across data centres, associated engineering services, cooling systems, semiconductors and memory storage, as well as related commodities such as copper.

“For Australia, the positive flow-on benefits of AI have primarily been seen in the resources sector. Beyond the AI build-out, commodity prices have risen and remained higher for longer in 2026, supported by resource scarcity, a growing preference for physical over financial assets, and the appeal of HALO (heavy assets, low obsolescence) businesses. These assets are viewed as defensive, with low beta characteristics and rising replacement costs that continue to underpin strong valuation support.”

Volatility expected to remain

James Abela comments: “Factor leadership has shifted towards value and momentum, while quality has underperformed as duration concerns have weighed on companies traditionally viewed as having more predictable and resilient earnings profiles.

“There is still double-digit earnings per share (EPS) growth expected over the next 12 months, and index-level valuations are not elevated at around 16 times forward earnings. However, much of this growth is being driven by resources and energy, with limited breadth across other sectors remaining a key concern. With consumer and business investment sentiment still subdued, caution is likely to persist. Positively, the Australian market continues to expand, which we believe will support index performance over time.”

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Based in Sydney, Rosie brings more than 20 years of experience in global equities across portfolio management, fundamental research and valuation. In her new role, Rosie will manage the Fidelity Global Equities Fund and Fidelity Hedged Global Equities Fund, a key offering within Fidelity’s Australian domiciled fund range.

Rosie’s appointment reflects Fidelity’s continued commitment to active global equity investing and to ensuring Australian clients have access to Portfolio Managers with deep global expertise.

Rosie joins Fidelity from Australian Foundation Investment Company, where she established and led the firm’s Global Equities strategy. In this role, she designed the investment process and built a diversified, long-term, low-turnover portfolio focused on high-quality businesses.

Prior to this, Rosie was a portfolio manager and head of franchises at Magellan Asset Management, where she was responsible for investment and portfolio recommendations and held sector leadership responsibilities within a concentrated global equities strategy. She also served on the firm’s Investment and Macro Committees.

Rosie began her career at Goldman Sachs, working in Sydney and New York for 15 years, where she gained extensive experience across valuation, strategy, capital markets and company analysis.

Simon Glazier, managing director, Australia, at Fidelity International, commented:

“Rosie is a highly experienced global equities investor with a strong track record of building disciplined, high-quality portfolios. Her deep expertise, combined with her experience in establishing and leading global equities strategies, makes her an excellent addition to our team.

“Rosie’s appointment reflects our continued commitment to strengthening our investment capabilities in Australia and delivering high-quality outcomes for our clients. We are particularly excited about her leadership of the Fidelity Global Equities Fund and the opportunity to further grow and evolve our offering in the local market.”

Rosie’s appointment underscores Fidelity International’s focus on investing in local talent and expanding its global investment expertise to better serve clients in Australia.

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Maroun Younes

With market uncertainty increasing, investors should look to quality companies that have the ability to generate consistent profits and consistent returns regardless of the macro-economic environment, says Fidelity International portfolio manager, Maroun Younes.

“Historical data shows quality does well in uncertain environments, but where there is positive slower growth, such as the one we are currently experiencing. The macro-economic picture is becoming murkier, and the euphoria of high growth and positive sentiment is subsiding. This tends to coincide with periods where quality starts to rise to the top.”

Younes concedes there is debate about how to define ‘quality’. “Some academics focus on profitability metrics, margins, returns, and volatility of the earnings profile. Others use metrics like shareholder payout ratios and balance sheets to define quality.”

Younes says it is important to look at quality in the context of the valuation multiples as well as the business’ sustainability. “Resilience and durability are key. Investors should look for companies that can withstand the curve balls that the global marketplace throws from recessions, pandemics, wars, rising interest rate environments and increasing competition. Having a strong and solid footing means a business can withstand the impact from different forces effectively. This is the mark of a quality business,” says Younes.

The Fidelity Global Future Leaders Strategy has conviction positions that are expected to benefit from the inflexion in the market led by AI capex investments. “We have a high level of conviction in the sustainability of the AI capex build up for the next two years and hold a number of companies exposed to the trend in our portfolio. For example, we have maintained conviction in Halma (LON: HLMA) for some time now, and we have seen that rising hyperscaler data-centre investment has benefitted its photonics and technology solutions division. Our position in electrical services provider Comfort Systems USA (NYSE: FIX) rallied after reporting solid fourth-quarter results and highlighting a robust order backlog supported by sustained data centre demand,” he says.

Younes adds, “Recent geopolitical tensions have introduced a renewed layer of uncertainty in the market, but investors should not lose sight of their long-term goals. Quality can contribute to very strong performance in the long term. The message to investors is to stay the course, because over the long term, quality outperforms.”

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In its report, Lonsec noted that “The Fund benefits considerably from Fidelity’s vast global research capabilities” and “experienced portfolio management team that shares significant co-tenure in operating this and other systematic strategies”.

The Fidelity Research Global Equities Fund focuses on equity securities of companies in developed and emerging market countries throughout the world. The strategy provides an opportunity for investors to leverage Fidelity’s research analysts’ best stock recommendations, in a systematically constructed portfolio to mitigate factor or style biases, with the aim of delivering strong returns primarily driven by Fidelity’s stock selection capabilities.  It is managed by three portfolio managers, Matt Jones, Hiten Savani and Daniel Swift.

The Fund’s investment philosophy is anchored on the belief that the consistent capture of proprietary idiosyncratic alpha from Fidelity’s global team of fundamental analysts delivers long term outperformance. Fidelity’s extensive global research platform benefits from over 50 years of investment knowledge and proprietary research that is grounded in the conviction that both overall macroeconomic trends and fundamental research can help predict the prospects of individual companies with a great degree of accuracy

Simon Glazier, managing director of Fidelity International Australia, says there has been growing interest in systematic investing approaches amongst Australian investors. “The current volatile market is one where systematic investing can be particularly attractive.  As an investment approach, it allows customisation, repeatability, risk control and portfolio construction. Investors are telling us that this stable and persistent approach is very attractive in an uncertain environment. And unlike conventional passive strategies, our approach offers the potential to outperform the index by harnessing the best ideas from our global team of analysts.” 

While there can be varied definitions of what systematic investing encompasses, portfolio manager Matt Jones says that Fidelity’s approach is to use strong fundamental research, systematic processes and strong portfolio construction to deliver alpha to investors.

“Systematic investing can also help avoid unintentional biases, both conscious and unconscious. This includes “style-drift”, where a value bet or growth bet, or a preference for large or small caps, can creep into portfolio construction without investors realising it. In addition, we can draw on our vast set of proprietary fundamental data that no-one else has access to, based on research and analysis by Fidelity experts from around the world, over many decades.  We also believe it is very important to be forward-looking, especially in the current environment, which is different to other quant-based funds,” he says.

In its report, Lonsec also noted the resourcing, saying: “The key edge over peers is the breadth of on-the-ground resourcing from Fidelity’s large analyst pool for idea generation.”

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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

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Niamh Brodie-Machura

Companies entered the year feeling better than at any point since the chaotic aftermath of the Covid pandemic, driven by a once-in-a-generation investment boom in artificial intelligence (AI).

These are the central findings of Fidelity International’s 2026 Analyst Survey^[1], capturing insights from more than 120 equities and fixed income analysts, based on over 20,000 meetings with company management teams worldwide. The survey captured sentiment through early March; since then, the prolonged conflict in the Middle East, including escalating attacks on energy infrastructure, has introduced a more persistent cost and inflation shock that is shaping the near-term macro backdrop.

While corporate sentiment has strengthened, the survey also highlights emerging pressures beneath the surface. Elevated raw material costs and slowing wage growth are placing pressure on consumers, creating downside risks for the global economy. At the same time, the Middle East conflict has shifted from a headline risk to a supply disruption that tightens physical availability and raises prices, with the risk that prolonged disruption could sustain these pressures for longer than previously expected. 

AI investment broadens

The survey shows the proportion of analysts reporting greater management confidence in business investment over the coming year has climbed back toward post-pandemic peaks.

Analysts are clear on the source of that optimism. The global economy is in the midst of one of the largest investment cycles in years, driven by spending on artificial intelligence and the infrastructure required to support it.

Niamh Brodie-Machura, CIO, Equities at Fidelity International comments: “Our global analyst team’s company-level insights show this is not just a narrow technology rally. AI investment is cascading through power and industrial supply chains, extending the cycle beyond the largest tech platforms.”

That investment is bolstering demand across supply chains and extending revenue visibility for years ahead. Information technology is the clearest beneficiary, but the effects are also visible in materials and energy, where demand for power and the commodities needed to construct datacentres and expand generation capacity is driving a boom in several areas.

Some 81 per cent of IT company managers are moderately or significantly more confident about the year ahead, alongside 65 per cent in materials.

Sam Heithersay, Portfolio Manager, at Fidelity International comments: “The initial phase of this AI rally has been dominated by investment in compute and data centres to the benefit of a narrow set of offshore tech companies but the productivity dividend of this investment is likely to be much more distributed as companies embed AI into workflows to drive operational efficiency. Australia is well placed to benefit from this AI diffusion and we have conducted our own company survey work to better understand which ASX companies are most mature in their AI adoption as we think AI can reset long-held competitive advantages.” 

Costs remain a constraint

Yet the survey also highlights mounting pressure on corporate cost bases. Only 8 per cent of analysts expect inflationary pressures to ease over the next 12 months. Around half anticipate costs pressures will remain at current levels, while 40 per cent foresee further increases. Materials and industrial sectors report particularly strong upward pressure.

Higher raw material prices, energy costs and trade frictions, intensified by geopolitical tensions, are sustaining supply-side inflation and adding to pressure on demand.

Justin Teo, Investment Analyst, Equities at Fidelity International comments: “The Reserve Bank of Australia increased interest rates by 25 basis points at each of its last two meetings in February and March, leading to a cash rate of 4.10 per cent. This is contrary to some central banks around the world that are looking to cut rates in 2026. Supply-side inflation – in particular oil and gas – has increased the probability of higher interest rates globally due to inflation concerns. Finding companies with pricing power will be critical for investors as these companies are more likely to maintain margins, as was the case during the COVID related supply-chain inflation period over 2020-22.”

Fidelity’s quarterly indicators also show expectations for labour cost growth moderating to their lowest level in three years. The divergence between sustained input costs and softer wage momentum raises concerns about household purchasing power. 

Sam Heithersay comments: “Australia is a relatively high-cost jurisdiction, labour costs increased materially post-Covid and are sticky downward so remain above pre-Covid norm. Company management seems resigned to a higher for longer cost base given low unemployment and a skills shortage. Australia’s resources exposure provides a partial offset to this persistent inflation as commodities have historically provided a natural hedge against global cost inflation.”

A widening divide

For analysts covering consumer staples and discretionary companies, affordability and demand risks are now the primary concern. While AI-exposed industries benefit from capital markets strength and infrastructure spending, middle-income consumers face rising fuel costs and limited wage growth. Healthcare analysts similarly point to fiscal trade-offs as governments increase defence spending, potentially intensifying pressure on public healthcare budgets.

The result is an increasingly uneven economic landscape. Companies tied directly to AI infrastructure are seeing confidence, capital deployment and expected returns improve. In contrast, sectors dependent on stretched consumers or exposed to political pricing pressures face tighter margins and demand headwinds.

Niamh Brodie-Machura comments: “The investment backdrop is supportive, but it is becoming more selective. Companies with pricing power, strong balance sheets and exposure to AI are positioned differently from those reliant on stretched consumers. As the gap between winners and losers widens, detailed fundamental research and active stock selection become increasingly important. Against a more volatile geopolitical backdrop, the survey’s overall message remains that AI investment is reshaping the corporate cycle. The breadth of spending across infrastructure and supply chains suggests that the impact extends beyond technology giants. However, the interaction of prices, politics and wage dynamics means the benefits are not yet evenly distributed, reinforcing signs of a K-shaped global economy.”

Justin Teo adds: “The K-shaped economy seen in the United States is also present in Australia where people in the top quartile of income are experiencing positive wealth effects from asset price inflation, whereas people in the bottom quartile are experiencing tighter household budgets due to limited wage growth and cost inflation for necessities like groceries and fuel. What’s unique to Australia is interest rates have been rising, so consumers with mortgages are facing higher servicing costs and lower disposable income, whereas retirees who have no mortgage and invest largely in term deposits are experiencing greater disposable income. This is a tough environment for consumer discretionary stocks.”

Read the report.

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Notes:
[1[ https://www.fidelity.com.au/learning-hub/analyst-survey/ Source: Fidelity International 2026 Analyst Survey. The survey was conducted 20 Feb – 2 March 2026, with follow-up interviews with the team following the start of the Middle East conflict. The survey features responses from 122 analysts around the globe.

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Max Stainton

The US Federal Reserve left rates unchanged, as expected, maintaining the Fed funds target range at 3.5–3.75 per cent. In the press statement, the Committee (FOMC) made clear that geopolitical risks add an increased layer of uncertainty to both sides of the mandate, but other than that, there was little change to the consensus-driven statement. Indeed, little change was the order of the day, with a small 20 basis point increase in core inflation expectations, which wasn’t mirrored on the interest rate side resulting in a modestly dovish tilt. However, the shift to a single dovish dissent, versus the two or three expected, added a slightly hawkish nuance. Taking it all together, the sense is of a committee constrained by uncertainty, waiting for events in the Middle East to unfold.

In the press conference, Chair Powell attempted to provide a measured and calm set of forward guidance emphasising the need not to overreact to current events, noting “it’s too soon to know how these will affect the data”, and emphasising exceptionally high uncertainty. He instead placed emphasis on maintaining inflation credibility, particularly through the lens of inflation expectations. Chair Powell also made clear that the Committee is comfortable taking a wait-and-see approach as the impact of the conflict unfolds, while placing greater weight on the need for goods inflation to slow meaningfully over the year. He was explicit that any bias towards easing remains conditional on that progress materialising.

Looking ahead to the rates outlook for the rest of the year, this will unsurprisingly be dominated by developments in the Middle East. In our base case scenario of oil prices remaining elevated but rangebound at $90-$110/bbl, we would expect the Federal Reserve to remain on hold for longer, with the bar for near-term easing rising. That said, we do not think this environment, on its own, is sufficient to drive a renewed tightening cycle, as the growth drag should remain manageable and the shock is likely to have a one-time price effect, rather than being broadly inflationary.

By contrast, a move into an upside tail risk scenario with oil prices above $120/bbl (a significant fat tail risk that is currently rising in probability) would create a materially more difficult policy backdrop. Such a sustained oil move would reinforce a higher-for-longer stance, particularly if transport and broader goods prices begin to reaccelerate alongside rising fuel costs. However, we would also expect the medium-term policy path to become less linear, as a deeper energy shock would raise the risk of demand destruction and recession later in the year.

Taken together, if our base case scenario plays out, then we would still expect one to two cuts from the Fed this year. But we would note that events are shifting rapidly in the Middle East with signs of escalation appearing after Iranian energy infrastructure was hit today, which, if this persists, almost certainly removes the chances of cuts this year.”

By Max Stainton, senior global macro strategist

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Peiqian Liu

China’s latest Government Work Report delivered few surprises. Most quantitative targets aligned closely with market expectations, reinforcing a message of policy continuity: stable growth, calibrated adjustment, and incremental easing rather than large-scale stimulus. The real GDP target has been adjusted to 4.5–5%, compared with “around 5%” in the prior two years, reflecting a more realistic assessment of structural headwinds and softer external demand.

The inflation target remains unchanged at 2%, signalling confidence that price pressures will stay contained. This reflects the economy’s bifurcated dynamics where pockets of resilience coexist with areas of softness. Policymakers appear comfortable maintaining price stability while supporting moderate growth. Labour market targets remain steady, with 12 million new urban jobs and a surveyed unemployment rate of 5.5%. Employment stability continues to serve as the primary social and macroeconomic anchor.”

Anchoring stability and prioritising rebalancing

The overarching theme is economic rebalancing. Policymakers are placing greater emphasis on domestic demand – both investment and consumption – as external demand becomes more uncertain and the supply-led growth model shows diminishing returns. After several years of leaning heavily on industrial capacity and export strength, authorities appear intent on gradually shifting the growth engine inward.

However, this transition remains measured. The policy mix still favours investment and corporate sectors, even as official rhetoric highlights support for households. Technology, innovation, and new growth drivers continue to anchor long-term strategy, reflecting Beijing’s structural focus on upgrading productive capacity and industrial competitiveness.

The fiscal stance remains expansionary but measured. The official budget deficit is maintained at 4% of GDP, signalling a structurally wider central government role in supporting growth. Ultra-long central government bond issuance will remain elevated at RMB 1.3 trillion, consistent with the shift toward longer-duration funding and central balance sheet utilisation.

While boosting consumption is a stated objective, the approach is restrained. Support measures appear directed toward employment stability and wage growth rather than large-scale direct transfers. Household policies are likely to focus on targeted groups rather than broad-based fiscal expansion. This underscores both fiscal constraints and a preference for structural, supply-side measures over demand-driven stimulus.”

External Risks and Policy Flexibility

The conflict in the Middle East is unlikely to materially alter China’s domestic growth trajectory, given contained spillovers so far. However, policymakers have signalled greater flexibility in both policy calibration and growth targets, reflecting a precautionary stance amid rising external uncertainties and potential volatility in global energy and financial markets.

The report contains early signals of tax reform, including commitments to expand revenue sources and increase the tax-to-GDP ratio. This suggests a gradual shift away from property-related financing models that have underpinned local government revenues in recent years. The adjustment reflects both structural necessity and the cooling of the real estate sector.

Given the overall fiscal impulse, the burden of additional easing is likely to fall more on the central government. Incremental fiscal expansion in coming quarters remains possible, but large-scale stimulus appears unlikely at this stage.

By Peiqian Liu, Asia economist

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