Kellie Wood

Investors should prepare for a more selective fixed income market over the coming quarter, as economic data increasingly takes precedence over central bank guidance and divergence between economies creates new opportunities, according to Schroders head of fixed income, Kellie Wood.

Wood says investors should be less focused on trying to predict the next global rate move and instead look for markets where the economic and policy outlooks are diverging.

“The next quarter is going to be about the data, not what central banks say they are going to do,” said Wood.

“For investors, that means being more selective about where they take duration and credit risk, rather than assuming all bond markets will move in the same direction.”

Wood believes Australian fixed income is well placed as softer inflation gives the RBA greater scope to move towards lower rates, while the US still faces a more uncertain inflation outlook.

“We continue to see a strong case for Australian bonds relative to US Treasuries. For investors, the opportunity is not simply that Australian rates could fall, but that the separation between Australia and the US creates an attractive relative-value opportunity.”

With credit spreads already tight, Wood says investors should focus on the income available from high-quality credit rather than relying on further spread compression to drive returns.

“Credit continues to offer investors attractive income, but we think security selection will become increasingly important.

“We favour high-quality Australian corporate and bank credit, where strong balance sheets and demand provide a solid foundation for returns.”

Wood says the changing market environment means investors need to think beyond whether central banks are cutting or holding rates.

“Investors have spent a long time focusing on the next central bank decision. The more important question now is where the economic data is taking us,” Wood said.

“That creates opportunities for investors who are prepared to look across markets, sectors and the yield curve rather than simply making a broad call on bonds.”

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Sebastian Mullins

The July tech sell off is a sign of crowded positioning and not a broken AI investment case, says Sebastian Mullins, head of multi asset and fixed income at Schroders.

“The speed of the sell-off reflected just how stretched positioning had become in technology stocks rather than a collapse in the underlying investment case for AI,” said Mullins.

“Markets had become heavily concentrated around a handful of AI beneficiaries. Once sentiment shifted, leveraged positions quickly unwound, amplifying the move lower.”

While semiconductor stocks and AI-linked markets fell during July, earnings season reinforced the strength of the sector, with Microsoft, Amazon and Apple posting strong results and boosting capex plans.

“When the chips were down, the hyperscalers didn’t fold,” said Mullins.

“The long-term structural growth story remains intact.”

Mullins said the macro backdrop still points to resilient growth, not recession.

“While markets have become more volatile, we’re not seeing the conditions typically associated with an economic downturn,” he said.

“Consumer spending remains healthy, earnings continue to surprise on the upside, inflation is easing and our recession indicators remain benign.”

Risks persist, including central bank policy uncertainty, higher oil prices and ongoing tensions in the Middle East, but Mullins says this is unlikely to derail the broader investment outlook.

“There are still reasons to be cautious, particularly around policy uncertainty and the eventual pace of AI investment,” he said.

“However, the recent correction has also removed some of the excesses that had built up in markets, creating a healthier backdrop for investors. Periods like this often create opportunities for long-term investors willing to look through short-term market noise.”

“Our view remains that economic growth is holding up. Inflation is gradually moderating and earnings momentum continues to improve. That combination continues to support risk assets over the medium term. While volatility is likely to persist, we believe investors should stay focused on the long-term outlook rather than reacting to short-term swings.”

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James Tsaousidis

The hunt for yield and accelerating investment in artificial intelligence (AI) infrastructure will shape Australian credit markets in the second half of the year, according to Schroders.

Investment analyst James Tsaousidis says the Australian reporting season will be the catalyst for credit markets, with investors closely watching corporate issuance, forward earnings guidance and the continued expansion of AI-related infrastructure.

“We expect higher-yielding Australian credit to remain well supported over the coming months,” said Tsaousidis.

“Demand for quality yield continues to outweigh supply, and while reporting season should generate new issuance, if higher-beta supply remains limited, the favourable technical conditions that supported markets through July are likely to continue.”

Tsaousidis said the biggest theme remains the rapid growth of AI and the infrastructure supporting it.

“The extraordinary level of investment from global hyperscalers, including Amazon, Microsoft, Meta and Alphabet, is reshaping global credit markets,” he said.

“While Amazon’s recent US$25 billion bond issue tested investor demand in the US market, Australia’s AI story is only just beginning. The overwhelming demand for CDC Data Centres’ inaugural senior secured transaction demonstrates investors are increasingly looking for exposure to the infrastructure underpinning the digital economy.”

Tsaousidis said the search for yield should support subordinated financial and corporate debt.

“With Australian inflation easing and interest rate expectations remaining relatively stable, credit continues to offer attractive income opportunities,” he said.

“We remain positive on financial Tier 2 debt and selected subordinated corporate securities. That imbalance between supply and demand should continue to provide a supportive backdrop for the sector.”

This was most clear in July, when investors competed for a shrinking pool of higher-yielding bonds. Barclays’ perpetual non-call six-year AT1 bond was among the month’s strongest performers, with its credit spread tightening by as much as 40 basis points as demand outstripped supply.

Looking ahead, Schroders expects the strongest opportunities to remain in high-quality companies with resilient cash flows, while monitoring emerging pressures in Australia’s retail private credit market.

“The challenges we’re seeing across parts of private credit, such as pressure from commercial property exposures, higher borrowing costs and increased regulatory scrutiny, reinforce the value of quality, liquidity and transparency in listed credit markets,” Tsaousidis said.

“Those issues are largely confined to private markets, and we remain confident that high-quality public credit offers an attractive balance of income and resilience as investors navigate an uncertain macroeconomic environment.”

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Sebastian Mullins

Investors relying on the same defensive assets to protect their portfolios through every market downturn risk being caught out, with recent geopolitical events exposing how quickly traditional investment playbooks can become outdated, according to Schroders.

Sebastian Mullins, Head of Multi-Asset and Fixed Income at Schroders, said the long-held belief that government bonds or gold would reliably offset equity market volatility no longer reflects today’s investment environment.

“For decades, investors could rely on a relatively stable relationship between growth assets and traditional defensive assets,” said Mullins.

“That world has changed. Persistent inflation, geopolitical conflict and supply-side shocks have created a market where the assets that protected portfolios in one crisis may fail in the next.”

Mullins said investors have experienced first-hand how different crises produce very different market outcomes.

“During the market uncertainty of 2025, gold and international assets performed well as investors moved away from the US. Yet when conflict escalated in the Middle East this year, the market response was almost the opposite. The US dollar strengthened, capital flowed back into US assets and gold failed to provide the protection many investors expected.

“The lesson isn’t that gold no longer has a role. It’s that investors need to understand what is driving each market event rather than assuming the same assets will always behave the same way.

“The same principle applies to fixed income. There is still an important role for government bonds, but investors can no longer assume they’ll always offset equity market weakness.

“Active management matters far more in today’s environment than it did during the era of ultra-low inflation and near-zero interest rates.”

Mullins said investors should broaden their definition of diversification beyond the traditional mix of shares and bonds.

“Modern portfolio construction isn’t about finding one perfect hedge. It’s about building a range of exposures that respond differently depending on what’s driving markets.

“That may include commodities during supply shocks, currencies during geopolitical events, or alternative assets that have genuinely different return drivers.”

He said Schroders’ own investment decisions over the past year reflect this shift.

“As geopolitical tensions and supply-chain risks intensified, we reduced exposure to assets that had traditionally been viewed as defensive and increased exposure to broader commodities that we believed were better positioned for an inflationary supply shock,” he said.

“As conditions evolved, we shifted again. Effective risk management today is about adapting to changing market conditions, not relying on a static portfolio.

“Looking ahead, inflation cycles, geopolitical fragmentation and supply disruptions are likely to remain defining features of markets.

“The investors who navigate this environment most successfully won’t necessarily be those who pick the best-performing asset class. They’ll be those prepared to continually reassess how they protect their portfolios,” he added.

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Helen Mason

A looming supply squeeze in Australian financial subordinated debt is creating a compelling market opportunity, according to Schroders’ Head of Credit, Helen Mason, with billions of dollars of securities being removed from the market in the past month as investor demand remains strong.

A$5.4 billion of Additional Tier 1 (AT1) and Tier 2 securities were called in June alone, while more than A$10 billion of financial subordinated debt is scheduled to be called before December.

At the same time, new issuance from Australia’s major banks is expected to slow over the remainder of 2026, creating a growing reinvestment challenge for investors and a potentially supportive backdrop for valuations.

Mason said the imbalance between shrinking supply and persistent demand had created a particularly strong environment for financial subordinated debt.

“The technical setup for financial sub-debt remains among the most compelling we have seen in some time,” Mason said.

“We are seeing several factors happening. Major bank issuance is slowing, billions of dollars of existing securities are being called, and investor demand remains persistent.

“More than A$10 billion of financial sub-debt is scheduled to be called before December, which is expected to further reduce available supply into year-end. For investors looking to reinvest that capital, the challenge is going to be finding sufficient supply”, she said.

The supply imbalance comes as Australia’s broader corporate credit market continues to attract significant investor demand despite geopolitical and macroeconomic uncertainty.

Corporate bond issuance is already close to setting an annual record with half the year remaining, driven in part by record issuance from offshore “Kangaroo” borrowers.

A recent A$1 billion wholesale hybrid transaction from CDC Data Centres was almost six times oversubscribed. And Volkswagen (VW) priced a A$250 million senior unsecured Kangaroo bond, adding to already substantial outstanding issuance of over A$3 billion in the domestic market.

Mason said the pace of issuance was a strong signal of the depth and resilience of the Australian credit market.

“Against a backdrop of significant geopolitical and macro uncertainty, the Australian credit market continues to print deals at a remarkable pace,” she said.

“Yields remain high, performance has been solid and credit quality is exceptional. The level of demand for quality investment-grade issuers at the right price remains very strong.”

Looking ahead, Mason expects primary market supply to slow over the coming months as offshore issuers retreat during the Northern Hemisphere summer, and Australian corporates and financial institutions enter pre-results blackout periods ahead of the August reporting season.

“Reduced net supply into a market with persistent reinvestment demand should provide a constructive backdrop for credit spread performance through the quarter,” said Mason.

“While macroeconomic data is beginning to show tentative signs of softening, we do not expect material credit stress to emerge across the investment-grade universe in the near term.

“The Australian corporate credit market’s skew towards defensive infrastructure and utility issuers should also help insulate investors from some of the broader macroeconomic risks.”

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The ratings upgrade comes at a pivotal time for Australian income investors after the Australian Prudential Regulation Authority’s (APRA) decision to phase out Additional Tier 1 (AT1) bank hybrids, prompting many investors to reconsider how they generate reliable income from their portfolios.

In its latest reports, Zenith said its conviction in both Schroders strategies had strengthened, describing them as “highly attractive” options in the Australian corporate debt sector.

Further, the strategies benefit from Schroders’ well-defined top-down investment framework, complemented by rigorous bottom-up security selection, enabling the team to identify opportunities across investment-grade corporate credit while actively managing portfolio risk.

Zenith: “With a long-term track record of managing domestic credit portfolios, Zenith considers the Fund to be a highly attractive option in the corporate debt sector and our conviction has strengthened, highlighting Schroders’ well-defined top-down processes and proven ability to manage portfolios through different phases of the cycle.

“In Zenith’s opinion, the top-down framework effectively combines a range of macro inputs with the team’s qualitative insights on the idiosyncrasies of the Australian credit market.”

The ratings reflect Schroders’ long-term track record in domestic credit investing and ability to actively manage portfolios through different phases of the credit cycle.

Zenith also highlighted the strength of Schroders’ portfolio construction process and investment team, identifying Head of Credit Helen Mason’s ability to actively manage portfolios through different phases of the credit cycle as a key competitive advantage.

Mason said the upgraded ratings reflected the team’s consistent investment approach and came at an important time for Australian investors.

“We’re delighted that Zenith has strengthened its conviction in both our wholesale fund and Active ETF. The upgrade reflects the depth of our investment process, the strength of our credit research and our disciplined approach to navigating changing market conditions.

“From an investor perspective, the phase-out of bank hybrids is reshaping Australia’s income investing landscape. Investors who have traditionally relied on hybrids are now looking for high-quality alternatives that can continue to deliver attractive income while managing risk.

“We believe actively managed investment-grade credit is well placed to meet that need through diversified exposure across corporate issuers and active portfolio management,” she added.

The upgraded ratings apply to:

• Schroder Australian High Yielding Credit Fund (Wholesale Class) (APIR: SCH0778AU)
• Schroder Australian High Yielding Credit Fund – Active ETF (Cboe: HIGH)

Both strategies seek to outperform the RBA Cash Rate by 2.5 per cent to 3.0 per cent, per annum (before fees) over rolling three-year periods while providing regular monthly income through investment in predominantly Australian investment-grade corporate credit.

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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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