Claire Smith

For most investors, Australian direct property has always looked like a safe and grown-up choice – tangible, local, familiar. In comparison, global private real estate has often looked like the exotic alternative. But Claire Smith, head of investment directors, public and private markets at Schroders, says the facts increasingly point the other way.

The familiar Australian residential trade is more exposed to changing tax policy than it used to be, which may prompt a shift in thinking, Smith says.

“For many Australian advisers, that line from their clients that they already own an investment property effectively ends the conversation about further investment before it begins.

“But owning one or two Australian assets is not the same thing as owning a genuinely diversified global property allocation.

“Concentration in a single geography, structure or sector can erode the portfolio benefits real estate is meant to provide. But a well-diversified pooled vehicle can preserve those benefits and reduce concentration risk. Institutional investors have understood this for years.

“The global opportunity set offers deeper diversification across regions, sectors and structures because of its access to institutional and off-market transactions, and the ability to participate in operational businesses and platform profits. At the same time, the global real-estate cycle is now offering better relative-value opportunities, precisely because repricing and recovery are not happening everywhere at once.

“It offers something Australian direct property often cannot – genuine global diversification, income backed by structural demand drivers, and access to active operational value creation, rather than passive rent clipping alone.

“None of this means advisers should treat the fund as a drop-in substitute for risk-free income.

“Private real estate carries liquidity, currency, valuation, tenant, development and market risks, and the semi-liquid structure uses managed liquidity rather than daily dealing.”

But she says, for advisers and consultants who want property exposure to do more than concentrate clients in one country, one tax code and one familiar asset class, a global real estate fund could be the answer.

“Global exposure gives advisers access to the part of the opportunity set that local direct ownership usually misses – different policy environments, different demographic drivers, different economic cycles, different repricing speeds, different occupier markets and different lease structures.

“This is particularly relevant in the current environment. The traditional Australian direct property model may look materially less attractive in the years ahead as proposed changes to negative gearing and capital gains tax concessions begin to reshape the post-tax return profile of local property investing.”

For advisers, that changes the conversation, Smith says.

“Australian direct residential property has often been sold not only as a growth asset, but as a tax-aware strategy. But if the tax shield is being narrowed for future purchases of established housing, then the investment case has to stand more squarely on underlying economics.

“That is where a globally diversified real-estate strategy starts to look more compelling because it does not depend on a single domestic tax regime to do the heavy lifting. Instead, it earns its keep through portfolio construction, sector selection, local execution and operational value creation.”

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Claire Smith

Schroders says fears around artificial intelligence (AI) disrupting software businesses have been overblown, with private equity investors taking a far more selective and measured approach than public markets.

Claire Smith, head of investment directors, public and private markets at Schroders, said investors had adopted a “guilty until proven innocent” mentality toward software companies, despite many businesses remaining deeply embedded in their customers’ operations.

“We think the market has overreacted,” said Smith.

“There’s been a view that AI is killing software. AI is absolutely reshaping parts of the software market, but the idea that every software company is suddenly at risk simply isn’t how private investors are thinking about it.

“When you look underneath the surface, many of these businesses still have highly sticky customer bases, proprietary data and critical functionality.”

Smith said Schroders had conducted a detailed “AI threat assessment matrix” across its software investments to determine which businesses faced genuine disruption risk and which were likely to remain resilient.

“We assessed whether AI could reduce the number of software seats being sold, or potentially make a platform redundant altogether,” she said.

“In our semi-liquid private equity fund, only around 2 per cent of the portfolio fell into what we classified as high risk.”

Smith said software businesses servicing highly specialised industries, particularly those handling sensitive or operationally critical data, remained difficult to replace.

“You’re not going to vibe-code your way around payroll systems handling confidential patient data. Businesses still need reliability, compliance and security. AI is not eliminating that,” she said.

Private equity valuations had also been less volatile than listed markets because private investors were not caught up in the rapid repricing of large US technology stocks.

“At one point we were valuing our portfolio at a 40 per cent discount to listed markets,” Smith said.

“That discipline meant when listed markets sold off, we didn’t experience the same level of volatility.”

While AI disruption remains a risk for some companies, Smith said the technology was also creating significant investment opportunities.

“We have invested in AI-linked businesses including a data annotation company servicing major artificial intelligence groups including OpenAI, Meta and Nvidia. We prefer businesses that are benefiting from the growth in AI infrastructure, rather than trying to predict which individual AI applications will ultimately win,” said Smith.

Beyond technology, Smith said many of the strongest private equity opportunities continued to come from stable, cash-generative businesses operating in niche industries.

“Sometimes the best investments are the boring ones. We look for companies with recurring revenues, strong customer relationships and services that businesses simply cannot switch off during difficult economic periods,” she said.

Smith said a growing number of opportunities were also emerging from founder-led and family-owned businesses globally as ageing owners seek succession solutions.

“Private equity can provide the capital and expertise to help these businesses continue growing while preserving the legacy founders have built,” she added.

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Kamblevicius believes investors risk overlooking the breadth of opportunities emerging across global markets as AI-related investment expands well beyond the dominant mega-cap technology names.

Speaking about the outlook for global equities, Kamblevicius said markets continue to be underpinned by resilient earnings growth across regions and sectors.

“While valuation multiples are elevated in some parts of the market, the earnings story we’re seeing globally remains incredibly encouraging,” said Kamblevicius.

“As long as companies continue to deliver earnings growth, equity markets can still generate strong returns without valuations needing to expand further.”

Kamblevicius said investor attention remained heavily concentrated on a small group of AI-linked technology companies, despite AI now spreading much more broadly across the global economy.

“AI beneficiaries stretch across a much broader supply chain than many investors realise,” he said.

“It’s not just chip designers like Nvidia. There are opportunities across semiconductor manufacturing, electrification, utilities, cooling systems, data centre infrastructure and industrial manufacturers globally.

“The capital expenditure that is coming into the market starts to benefit companies further down the supply chain; the companies that do cooling systems for the data centres, the companies that do wiring for the data centres. Micron (NASDAQ: MU), for example, is (as of Friday 22 May) the fourteenth largest company in the world from being very unknown 12 months ago.

“In Japan and Europe, parts of the industrial sector continue to offer attractively priced businesses with strong profitability and compelling long-term growth stories,” he said.

Kamblevicius also warned investors against focusing too narrowly on perceived risks within large-cap technology stocks while overlooking valuation pressures elsewhere in the market.

“Sometimes investors become too focused on the areas most discussed in the media while missing risks developing elsewhere. There are pockets of the market outside technology that are trading at much more difficult-to-justify valuations.”

He said heightened stock-level volatility and geopolitical uncertainty are making portfolio diversification and disciplined risk management increasingly important for investors.

“Single stock volatility is significantly higher than overall market volatility, which means position sizing and diversification are becoming increasingly important in protecting investor capital,” he said.

Kamblevicius said despite ongoing geopolitical tensions and market volatility, the combination of resilient earnings growth and expanding investment opportunities across sectors continued to support the long-term outlook for global equities.

“Until the earnings story becomes challenged, we continue to see solid opportunities for investors in global equity markets,” he said.

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As a result, returns have diverged and AI-related stocks are no longer moving in tandem, with performance increasingly reflecting views on who will ultimately win.

Arnold said the shift marks a turning point for investors.

“AI has entered a new phase, where broad exposure is no longer enough and returns are becoming far more selective,” said Arnold.

“Markets are now moving to a stock-by-stock assessment of who is best positioned to deliver sustainable returns, rather than rewarding the theme as a whole.”

Arnold identifies three critical factors shaping the next stage of the AI investment cycle; deployment of capital, debt, and demand, which together determine where value will emerge.

On capital deployment, Arnold noted that while technology companies continue to invest heavily in AI infrastructure, investors are becoming more discerning about how effectively that capital is being used.

“A year ago, rising capital expenditure was seen as a sign of confidence and leadership,” said Arnold.

“Tech businesses are committing vast sums to AI infrastructure; across chips, networking, data centres and cloud capacity. However, the market is increasingly questioning whether all this investment will generate sufficient returns.”

At the same time, increased use of debt across the AI ecosystem is adding complexity and risk, with markets beginning to differentiate between companies based on their balance sheet strength and ability to sustain investment.

“Take Oracle, issuing almost as much debt since January 2025 than in the previous seven years combined in a bid to accelerate its data centre build out. The perceived risk of its debt rose quickly in Q4 2025, signalling investor scepticism around its ability to catch up in the race for AI leadership and generate sufficient returns to justify both the investment, and the leverage used to fund it.

“The growing use of leverage is amplifying both opportunities and risks. But not all leverage is being treated equally, with markets more comfortable with the credit profiles and capital structures of other hyperscalers.”

Demand remains the most difficult factor to assess, with strong AI adoption not always translating into immediate revenue, particularly as companies balance short-term monetisation with long-term strategic investment.

“Understanding where real, durable demand sits requires much deeper analysis, as usage, pricing power and revenue can diverge significantly across the AI value chain,” Arnold said.

“Even at the individual company level, the link between demand and revenue can be unclear. This was evident in the market’s reaction to Microsoft’s recent earnings. Slower-than-expected growth in its cloud computing platform was initially seen as a leading indicator of weakening demand. However, management clarified this reflected a deliberate decision to redirect capacity towards internal AI development (such as Copilot), aimed at driving long-term monetisation.”

Schroders believes the next phase of the AI cycle is underway, with markets now treating companies in the space very differently.

“Broad exposure to the theme has worked up until recently, but it’s becoming clear that stock selection, not general thematic exposure, will drive the next leg of returns,” said Arnold.

“Diversification remains critical, but the focus now is on identifying the companies that can execute and deliver sustainable returns through the cycle,” he added.

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Helen Mason

Australian credit markets are undergoing a clear shift, with investors becoming increasingly selective as macroeconomic uncertainty builds, driving a strong rotation toward high-quality issuers, Helen Mason, Schroders’ head of credit says.

With ongoing conflict in the Middle East delivering unprecedented global oil supply disruption, financial markets have struggled to gain a clear read on inflation or growth.

For Australian businesses, the impact is already filtering through. Mason says higher fuel costs are acting as an immediate drag on consumers, with flow-on effects expected across retail, travel and discretionary sectors.

“Higher petrol prices hit households quickly and broadly, which weighs on spending,” Mason says.

“That has clear implications for sectors like retail and travel, where we would expect to see softer demand.”

Companies such as Ampol, Qantas and Air New Zealand are likely to feel the impact of weaker travel demand, while retail A-REITs may also face pressure as consumer activity slows.

Despite the more cautious tone, primary markets have remained active, with issuers including NBN, Dalrymple Bay Coal Export Terminal, Charter Hall Finance, MyState Bank and Meridian Energy successfully accessing capital with healthy demand.

“This level of activity highlights that demand for credit is still there,” Mason says.

“But it’s highly selective. Capital is flowing to issuers that can offer certainty and resilience in an uncertain environment.”

At the same time, higher-beta issuance has begun to stall. Mandates from names such as Qantas, NextDC and Investa Commercial Property Fund were delayed or pulled as investor appetite softened through the month.

“That divergence is telling,” Mason says.

“The market is clearly drawing a line between defensive, high-grade credit and anything perceived as more cyclical or exposed to economic slowdown.”

Even global issuers have tested the market, with US telecommunications giant Verizon launching a $1.3 billion subordinated deal in Australian dollars. Mason noted pricing was tight relative to conditions, with the bonds underperforming shortly after issuance.

“It’s a good example of how quickly sentiment can shift. Even high-quality global names are not immune if valuations don’t stack up in a more volatile backdrop.”

The repricing in credit reflects a broader adjustment across markets, with rising input costs, persistent inflation and tighter financial conditions increasing pressure on corporate earnings and refinancing.

Mason added that growing dispersion in credit spreads is beginning to create more attractive entry points for active investors.

“For a long period, spreads were compressed across the board,” Mason says.

“Now we’re starting to see genuine differentiation, which creates opportunities to add value through careful security selection.”

Looking ahead, uncertainty is expected to remain a defining feature of markets, with the path for credit dependent on how macro conditions evolve.

“The range of outcomes remains wide, and that calls for discipline,” Mason says.

“Investors need to stay selective, focus on quality and be prepared for continued volatility.”

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Claire Smith

Investors shouldn’t overlook fundamentals as increased volatility and recent sell offs across the SaaS sector leads to broader questions of whether it is facing a sentiment-driven correction tied to AI headlines, Claire Smith, head of investment directors, public and private markets at Schroders Australia says.

She says that while AI is impacting some companies, it is not happening across the board and it requires a more considered approach from investors.

“AI is changing the rules and businesses will come under pressure, but others will strengthen their position by embedding AI into their products,” Smith says.

“Treating the entire sector as one ignores the reality that outcomes will be very different from company to company.”

Agentic AI and the rapid democratisation of software creation are expected to challenge parts of the SaaS model, particularly businesses reliant on per-seat pricing or those without strong proprietary data or deep integration into customer systems. However, the key issue is whether AI’s software disruption will play out across different companies.

Michael McLean, head of private equity technology investments at Schroders says a blanket sell-off across the SaaS sector is not justified.

“While agentic AI technologies will potentially reduce the number of seats for certain specific SaaS applications, a blanket sell off across the industry as a whole isn’t really warranted. It’s company specific.”

Schroders says assessing AI risk requires a clearer framework, distinguishing between the potential for AI to reduce user numbers and the risk that it replaces core product features. It also highlighted that private markets may be better placed to respond to these shifts.

McLean says a clear focus is on how quickly companies can adapt, whether through product changes, pricing adjustments or strengthening their competitive position.

“AI is changing so quickly, and we’re able to have almost a real time pulse on how it’s impacting the portfolio and strategy,” McLean says.

“There’s a clear benefit of early visibility into emerging technologies. Our long-standing involvement in venture investing provides insight into how quickly AI innovations are moving from development to real-world adoption, helping inform investment decisions.”

Schroders says while technology represents a portion of the portfolio, software doesn’t dominate its private equity exposure. A smaller share is in software and SaaS businesses, which helps reduce exposure to volatility in that segment and reinforces the need for active management.

McLean says the broader message for investors is that AI is not a simple negative for software, but a force that is altering the sector in more complex ways.

“Investors shouldn’t be writing off software altogether. But it is important to better understand where the risks sit, where the opportunities are, and taking a more selective approach in a rapidly changing environment.”

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Arnold says the past year has seen enormous sums being poured into technology as major tech players race to build the infrastructure needed to support artificial intelligence, and investors are questioning whether that will translate into real revenue and justify the scale of spending.

“The first question is about deployment of capital. If you’ve owned stock in any AI business over the past two or three years, it’s likely you’ve done very well. But the level of capex upgrades we have seen during reporting season has been huge,” Arnold says.

“Technology giants have committed hundreds of billions of dollars to data centres, chips and computing power to build the backbone of the AI economy. But as spending rises, so too does the pressure to generate returns.

“Now, the market is starting to take a different view on how sustainable these projections really are, and what we saw toward the back end of 2025 was different companies being rewarded or punished in very different ways.

“We’ve seen a sell off across several major tech companies in recent months. As a result, investors are being punished, software companies are being punished, and the hyperscalers are being looked at very differently to how they were only twelve months ago.”

Arnold says debt is the second pressure point emerging in the sector.

“The combination of increased levels of debt and an inability to catch up on revenue expectations can become a real problem,” Arnold says.

“Share prices went up when the story around the growth potential of AI was positive. Now, as valuations have soared, we’re starting to see that optimism temper.”

The third and perhaps most important factor impacting investment is demand.

“As innovation occurs at a rapid rate, demand is becoming harder to track, but it remains the most influential factor. We spend a lot of time going through the AI tech stack asking whether demand is actually justifying the capex we see today,” Arnold says.

“Companies building AI infrastructure argue the spending is necessary because they are seeing the demand. Markets, however, are looking at these numbers and becoming more sceptical.”

Arnold says this has been most clear in software companies. The recent sell-off reflects a growing concern that some software companies may struggle to defend their business models in a world dominated by large language models.

However, Arnold believes some areas of the market will prove more resilient than others. Businesses that operate in environments where accuracy is critical, where switching systems is difficult, or where regulation creates barriers to entry are likely to maintain stronger competitive positions.

“If a company’s value is based purely on a publicly available data set, then a large language model is going to commoditise that,” Arnold says.

“Areas where there isn’t a tolerance for errors will likely be more protected.

“Similarly, companies that control proprietary data or have high switching costs embedded in their products may be better placed to defend their margins.”

As the AI investment cycle continues to accelerate, Arnold says investors will increasingly focus on these fundamentals rather than broad narratives about technological disruption.

“The market is moving beyond the excitement of the disruption theme, and for stock pickers it means there are opportunities to outperform. But it also comes with a higher level of risk,” Arnold says.

“What if AI turns out to be less ‘bubble versus boom’ and more a stress test for who can actually turn US$660 billion of capital expenditure into revenue?

“What matters now is whether the spending we’re seeing today can actually turn into sustainable revenue tomorrow.”

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Martin Conlon

Geopolitical tensions, changing market dynamics and a shift in investor sentiment are reshaping equity markets, according to the Schroders Australian equities team, who identified several key themes emerging from the latest reporting season and macroeconomic environment during a recent adviser webinar.

Head of Australian equities, Martin Conlon, said geopolitical uncertainty, commodity price fluctuations and structural changes in market participation are contributing to heightened volatility.

“There are a number of factors creating uncertainty for investors right now, including geopolitical tensions and movements in oil and commodity prices,” he said.

“At the same time, markets have seen passive and quant money dominate over recent years, which means there are fewer fundamental investors willing to stand against volatile share price movements. That can create additional, and sometimes artificial, volatility.”

Despite the challenging backdrop, Conlon urged investors to remain disciplined and focused on the long-term fundamentals of the companies they invest in.

“Panic is never a good sentiment for investment. If investors are thinking about the sustainable earnings of a company and whether they are paying a sensible price for it, they should generally be OK. The key is to remain rational and focus on fundamentals.”

Reporting season highlights mixed sector outcomes

The latest reporting season revealed stark differences in performance across sectors, with small earnings surprises often triggering outsized share price reactions.

In the resources sector, Justin Helliwell, head of research, Australian equities at Schroders, highlighted a strong result from BHP, driven in part by strategic announcements alongside its earnings release.

The company outlined clearer cost targets for iron ore and provided additional detail around its copper growth pipeline, signalling a more proactive approach to capital allocation and operational transparency.

Meanwhile, the healthcare sector experienced significant volatility, particularly among high-growth companies where valuations remain sensitive to even minor earnings disappointments.

Companies like CSL and Cochlear faced sharp share price declines following small revenue or earnings misses, reflecting the market’s reduced tolerance for companies priced for sustained high growth.

“High-multiple stocks are particularly vulnerable when the growth narrative falters, even slightly,” said Australian equities analyst, Sally Warneford.

“The market reaction to small disappointments has been extremely severe.”

However, some healthcare providers, including Ramsay Health Care and Sonic Healthcare, benefited from signs of improving margins following a period of cost pressures linked to wage inflation and post-pandemic activity disruptions.

Banks and housing demand remain resilient

One of the most surprising outcomes from reporting season was the continued strength of Australia’s banking sector, particularly given the higher interest rate environment.

Banks delivered strong results overall, with housing credit growth remaining robust despite concerns that higher rates would slow borrowing.

“It was a pretty solid result from CBA where we’re used to pretty solid results. But whether there was anything there to say, a 20 per cent rise in the CBA share price, it’s a little bit difficult to fathom why,” said Conlon.

“The bank sector is still as strong as housing credit growth is. We’re still seeing five to six per cent compound growth in housing credit in an already highly leveraged Australian economy. The question many investors are asking is where this demand is coming from, and when will it eventually slow.”

Despite expectations that higher interest rates would lead to rising bad debts, Conlon flagged that reporting season showed little evidence of credit deterioration.

Copper demand supported by electrification, but risks remain

In commodities markets, copper continues to attract significant attention due to its central role in electrification, renewable energy and data centre infrastructure.

However, analysts cautioned that while long-term demand growth is positive, current market expectations may be overly optimistic.

“Electrification is clearly a structural tailwind for copper demand,” said Helliwell.

“But when you look at the numbers more closely, demand growth is likely to average around two per cent per year. That’s solid, but not the exponential growth that some market narratives suggest.”

Helliwell also noted that supply dynamics remain critical in determining long-term commodity prices, and new projects could ultimately balance demand growth over time.

Durable businesses favoured more than short-term growth

Across sectors, the consensus was the importance of investing in durable businesses with sustainable earnings, rather than chasing short-term growth or popular narratives.

High-quality companies with strong balance sheets, cash flows and long-term relevance were seen as better positioned in the current environment.

“In uncertain markets, durability matters more than short-term growth,” Conlon said.

“The key question investors should always ask is whether a business will still be strong and relevant in 20 years’ time.”

He added that investors should remain cautious about highly leveraged companies or businesses dependent on optimistic growth assumptions.

“Ultimately, it’s about owning companies with strong balance sheets, sensible valuations and earnings that can stand the test of time.”

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Helen Mason

The Australian credit market has started 2026 with strong momentum, with more than $14 billion in new issuance in January alone, highlighting continued investor demand and a supportive environment for income-focused investors, according to Helen Mason, fixed income fund manager at Schroders.

Mason said the strong start to the year challenges the long-held view that local credit markets take time to gain momentum after the holiday period. However, broader economic backdrop continues to favour credit investors, with corporate earnings holding up and the impact of higher rates flowing through gradually.

“January issuance has been remarkably strong, exceeding $14 billion, demonstrating that both supply and demand remain firmly intact as we enter 2026,” said Mason.

“Even expectations of further rate increases later this year have done little to unsettle spreads, reflecting the ongoing appetite for yield.”

New issuance in January was dominated by domestic and offshore banks, alongside selected corporate deals. Notable transactions included the inaugural AUD bond from Hong Kong’s MTR Corporation which raised $2 billion, and $1.1 bullion corporate hybrid from AusNet Services that attracted strong investor demand.

Demand was evident offshore, with several Australian banks issuing approximately US$6 billion in senior debt, as well as a €1 billion subordinated note.

Mason said investor demand remained strong across the month with most deals oversubscribed, and new issue concessions limited. Bond maturities totalled around $7 billion, roughly half the volume of new issuance, resulting in a net inflow of capital into the market.

“This supports our expectation that Australian-dollar credit can continue to grow in 2026, driven by rising superannuation assets, attractive yields and sustained demand from global investors, particularly Asia,” she added.

Mason highlighted Australian seaports as an area of ongoing interest within credit markets, citing their critical role in the economy and stable long-term cashflows.

“Ports handle around 99 per cent of Australia’s import and export trade, supporting approximately $650 billion in annual commerce. Their geographic positioning and pseudo-monopolistic market structures help maintain the stability and reliability of cashflows.”

While issuance from the sector was limited last year, Mason expects funding requirements to rise as infrastructure upgrades accelerate, including automation, channel deepening, land development and expansion of intermodal facilities.

Strong spread performance in January was led by Tier 2 subordinated bank paper, utilities and infrastructure according to Mason, but dispersion between sectors and issuers remains significant.

“In this environment, sector rotation and active management are essential,” she said. “Despite strong overall demand, relative value opportunities continue to emerge across sectors, curves and issuers.”

She said portfolio positioning currently favours senior and non-financial paper, while exposure to subordinated bank debt remains below long-term averages largely due to supply dynamics.

Mason also noted increasing exposure to high-quality issuers in the metals, mining and chemicals sector.

“We have selectively increased our allocation to investment-grade borrowers in this space, more than doubling exposure since October, while maintaining no exposure to sub-investment-grade miners,” she said.

“With strong fundamentals, persistent demand and supportive structural drivers, Australian credit appears well positioned for another constructive year.”

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Adam Kibble

Global economic growth is expected to reaccelerate in 2026 as the delayed effects of interest rate cuts combine with ongoing government spending, creating a supportive but increasingly complex environment for investors, according to Adam Kibble, multi-asset portfolio manager at Schroders.

Kibble said that both monetary and fiscal policy settings remain accommodating across major developed markets, helping to drive stronger growth but also increasing the risk of inflation becoming more persistent than expected.

“Global growth is showing clear signs of reacceleration as the impact of rate cuts since mid-2024 flows through to economic activity. However, with governments continuing to prioritise cost-of-living support and stimulus spending, we are entering a ‘run-it-hot’ policy environment that could see inflation stall or even rebound during 2026,” he said.

Kibble flagged that central banks globally appear to be nearing the end of their easing cycles, with markets beginning to reassess expectations for further rate cuts.

“In many regions, policy remains highly supportive for growth, but central banks are becoming increasingly cautious as inflation progress slows,” he said. “This is creating a higher-for-longer interest rate backdrop that investors need to be prepared for.”

In Australia, economic growth has rebounded more strongly than expected, supported by a resilient labour market and solid consumer spending.

Kibble believes that ongoing capacity constraints across parts of the economy were slowing the disinflation process, raising the likelihood of further policy tightening by the Reserve Bank of Australia (RBA), following this week’s interest rate increase.

“Recent data highlights strong domestic demand and improving business confidence, but inflation remains sticky,” he said.

“The RBA’s latest rate increase reflects the persistence of pricing pressures, and markets are increasingly recognising that further tightening may be required if inflation does not moderate as expected.”

The US economy also exceeded expectations through the second half of 2025, driven by strong consumer demand and capital expenditure.

Kibble said fiscal stimulus and earlier rate cuts have supported growth momentum in the US, but the outlook for further monetary easing remains uncertain.

“While markets continue to expect further rate cuts by the Federal Reserve later in 2026, this will largely depend on whether inflation shows a meaningful and sustained decline. Without clear progress on inflation, the scope for additional easing may be limited.”

Kibble said with inflation risks rising and central banks nearing the end of their easing cycles, managing interest rate risk remains critical.

“We continue to position portfolios for a potentially prolonged higher interest rate environment, maintaining low duration exposure while selectively allocating across global bond markets,” he said.

“We are favouring longer-term bonds in Australia to mitigate the impact of potential RBA tightening, while maintaining exposure to shorter-dated US bonds to capture potential easing opportunities and reduce volatility.”

Despite supportive growth conditions, Kibble said credit markets currently offer limited value due to historically tight spreads.

“Credit fundamentals remain strong, but valuations are stretched and compensation for risk is low. In this environment, we are maintaining a focus on high-quality, liquid credit exposures, particularly in Australia and Europe, where yield curves remain relatively attractive,” he said.

Kibble added that recent strength in the Australian dollar had provided opportunities to actively manage currency exposures.

“The Australian dollar strengthened significantly earlier in the year as interest rate differentials widened and expectations of RBA tightening increased,” he said.

“However, with sentiment indicators suggesting the currency had become overbought, we have begun reducing exposure at elevated levels.”

While the macroeconomic outlook remains broadly supportive for growth, Kibble believes that there is a risk that the progress on lower inflation has stalled and may reverse.

“With spreads tight and policy uncertainty rising, maintaining liquidity and flexibility remains key to navigating potential market volatility and capturing opportunities as valuations evolve.”

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