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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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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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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Sam is an experienced investment professional who joined Fidelity in 2018. He has been a senior member of the Australian analyst team since June 2021, covering the Resources sector, a critical sector within the Australian market, delivering strong performance in the role. Prior to this, Sam spent three years in Fidelity’s London office covering US Healthcare, where he navigated the volatility of a US Presidential election cycle and the Covid-19 pandemic while generating positive investment results.

Sam holds a Masters in Business Administration from London Business School, a Masters in Mining Engineering from UNSW, and a Bachelor of Laws and Bachelor of Commerce from The University of Adelaide.

Sam has worked closely with Paul Taylor over the past five years, and the two share a closely aligned investment philosophy. His appointment adds further depth and continuity to Fidelity’s Australian equities capability, supporting long‑term investment outcomes for clients.

Niamh Brodie-Machura, Chief Investment Officer, Equities, Fidelity International comments: “Sam’s appointment reflects our continued focus on strengthening our Australian equities capability through the development of internal talent. He is a highly regarded investor with strong analytical skills and a proven contribution to investment performance. His addition as Co‑Portfolio Manager provides further depth, continuity and long‑term strength to the team as we remain focused on delivering strong outcomes for our clients.”

The Fund’s investment strategy, objectives and process remain unchanged.

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