Sebastian Mullins

A change in global monetary conditions is reshaping the investment outlook for emerging markets, Sebastian Mullins, head of multi-asset at Schroders Australia says.

Mullins says the end of an extended period of US dollar strength and high Federal Reserve interest rates has eased a major constraint on emerging economies, allowing central banks to focus again on domestic growth.

“Emerging market policymakers had little room to move, but that constraint is easing,” Mullins says.

“With US rates coming down and the dollar off its peak, many emerging markets can lower their own interest rates to support growth without risking sharp currency weakness.”

Mullins says this shift supports a broader reassessment of emerging markets.

“We’re moving away from a period where emerging markets moved almost entirely in step with the Fed or China,” Mullins says.

“That influence is fading, and we’re starting to see which economies can generate growth on their own terms.

“Countries that used the last cycle to strengthen policy credibility and control inflation are now better placed to benefit.”

South America could be potential beneficiary of this environment, supported by valuations, earnings trends and political dynamics.

“Valuations are low relative to history and other emerging regions, corporate earnings are improving, and in countries such as Chile there are signs of a shift toward more market-friendly policies, which could support investment and growth,” Mullins says

Elsewhere, heavy global investment in artificial intelligence is driving demand for physical infrastructure, supporting Asian economies that sit at the centre of the technology supply chain. At the same time, changes in global trade and supply chains are favouring countries such as Mexico as manufacturing moves closer to end markets.

While Chinese technology stocks have rallied, Mullins sees this as a short-term adjustment rather than confirmation of a sustained recovery.

“The recent engagement between policymakers and the tech sector sent a signal, and parts of the market reacted,” Mullins says.

“But a broader re-rating of Chinese equities will require stronger fiscal support aimed at the domestic consumer.”

While Schroders remains positive on global equities into 2026, it expects leadership to broaden.

“The US has delivered strong returns, but valuations are elevated,” Mullins says.

“As conditions shift, emerging markets have more freedom to act. For investors, this is one of the more attractive opportunities the asset class has offered in recent years.

“In 2026, we may be paying the same attention to the economic decisions made in Sao Paulo and Mexico City as the next move in Washington.”

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Sebastian Mullins

Investors are facing a fundamentally different market environment in 2026, with structurally higher volatility, greater government intervention and a need for more selective asset allocation, according to investment experts at Schroders.

Sebastian Mullins, head of multi-asset and fixed income, and Ben Arnold, investment director, global equity, say the post-GFC era of low inflation, low volatility and passive returns has given way to a new regime that demands a more active approach.

Mullins says that markets have transitioned into a period that more closely resembles historical norms than the unusually benign conditions of the past decade.

“We’ve moved into a new investing regime, one with higher inflation, more government intervention and greater volatility. That’s not a short-term phenomenon, it’s structural.”

Mullins notes that fiscal policy has become a central driver of liquidity and market outcomes, overtaking the role traditionally played by monetary policy. Defence spending, energy security, supply chain resilience and AI infrastructure investment are all contributing to sustained government intervention and higher debt levels globally.

“The invisible hand of free markets has been replaced by a very visible hand of government. That has far-reaching consequences for asset allocation. In this environment, inflation is likely to remain higher for longer, as governments seek to manage rising debt burdens through economic growth rather than fiscal restraint.”

While equities remain attractive relative to bonds, Mullins cautions that traditional diversification assumptions can no longer be relied upon.

“Investors should think of fixed income as an income strategy rather than a source of portfolio protection in an inflationary environment. Bonds now pay you income, but they no longer provide the protection investors once relied on.

“Asset allocation needs to be far more dynamic,” he says.

Arnold says artificial intelligence continues to be a powerful driver of earnings growth, but investors must be increasingly selective.

He points to rising leverage and unprecedented capital expenditure among some technology companies as early warning signs, noting that long-term winners will be determined by real-world adoption and sustainable margins rather than headline investment announcements.

“The key question isn’t how much companies are spending on AI, it’s whether adoption and returns justify that investment. Adoption will ultimately determine which companies succeed and which fall behind.”

He says the dominance of US mega-cap technology stocks is starting to unwind, with performance diverging significantly within the group commonly referred to as the “Magnificent Seven (Mag 7)”.

“Lumping all mega-cap tech stocks together is risky. These are very different businesses with very different outcomes, and the market is becoming more discerning. Five of the seven Mag 7 stocks underperformed the broader US market last year, highlighting the growing dispersion within mega-cap technology.

“Lower correlations within mega-cap tech signal a healthier equity market and reinforce the case for active stock selection,” he says.

Both Mullins and Arnold highlight improving opportunities outside the US, particularly in parts of Europe and select emerging markets, where valuations remain more attractive and earnings upgrades are emerging.

“You don’t have to own US mega-cap tech to access growth,” Arnold says. “There are compelling opportunities across Europe and other regions that investors have overlooked in recent years.”

Arnold says select European financials are examples of businesses benefiting from structural reform and earnings upgrades. He points to Italy’s Intesa Sanpaolo for its transformation into a stronger asset management-led business, and Austria-listed Erste Bank as a market leader across parts of Eastern Europe benefitting from earnings upgrades not yet fully reflected in market valuations.

Mullins notes that peripheral markets such as Italy and Spain delivered strong returns, challenging outdated perceptions of the region.

“The PIGS are now flying. These markets were up 60 per cent last year. There are compelling opportunities across Europe for investors willing to look beyond the obvious.”

Turning to domestic markets, Mullins says Australia stands out among developed economies for persistently high inflation, increasing the likelihood of further interest rate hikes, the opposite of that of the United States, where rate cuts are increasingly expected.

“Australia’s inflation challenge sets it apart from global peers. That has important implications for local interest rates and asset allocation decisions.

“With inflation still above target and employment running strong, the RBA has limited room to ease, making the outlook for Australian rates very different from the US.”

He adds that while global opportunities are broadening, Australian investors must remain focused on balancing income, inflation protection and risk as markets move further into a new cycle.

“Investors can’t rely on old playbooks in this environment. With inflation higher for longer and correlations changing, portfolio construction needs to be more deliberate and more dynamic.”

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Sebastian Mullins

As global economies chart a course through a new era of government-driven growth, investors must prepare for a landscape defined by both significant opportunity and rising volatility in 2026.

A panel of Schroders Australia’s investment leaders, including Martin Conlon, Sebastian Mullins and Kellie Wood, say the coming year will be one of divergence, where careful stock selection and a tactical approach will be vital, with the Australian market presenting a compelling picture.

Sebastian Mullins, head of multi-asset and fixed income, says that while the world economy continues to expand, the balance of risks has shifted considerably.

“A surge in government spending, shifting politics, and inflationary pressures will provide global markets with both opportunity and instability,” Mr Mullins says.

“We are now seeing a recovery taking hold in Australia, with growth expected to rise to around 2 per cent as household consumption finally takes the baton from government infrastructure spending. This is supported by an improvement in consumer confidence and a remarkably strong job market.”

However, Mullins notes that this positive momentum faces a key constraint.

“The counterbalance is that inflation remains strong, limiting the ability for the Reserve Bank of Australia to cut rates. Investors need to adapt to this new fiscal-driven landscape.”

A primary concern on the global stage is the concentration of market value in US technology stocks. Mr Mullins says soaring valuations and a surge in corporate debt issued to fund AI infrastructure are increasing the risk of a sharp market correction.

“One lingering concern is whether the strong performance in US tech stocks is a sign of an AI bubble,” Mr Mullins says.

“If we were to see a large equity market sell-off, this would impact the wealth effect of wealthy Americans, likely leading to reduced consumption. In this scenario, the stock market may lead the economy as opposed to the other way around.”

Mr Mullins says that while the largest AI players remain highly profitable, the funding environment is changing in a way that introduces new risk.

“Historically, AI investment was made from free cashflow, but companies like Oracle and Meta have started to use debt to fund their expenditure,” Mr Mullins says.

“US investment-grade issuance from AI big tech firms has risen from less than US$40bn per year to more than US$120bn year-to-date. If more debt enters the system, this will likely lead to a bubble that could pop. Any near-term weakness would be driven by a valuation unwind rather than a full-scale bubble collapse.”

Kellie Wood, head of fixed income, says global markets have entered a new regime where fiscal policy, not monetary policy, is steering the economic cycle.

“Globally, easing cycles are underway. US growth has reaccelerated, with momentum clearly stronger than in early 2025,” Ms Wood says.

“We expect the global economy to accelerate in 2026 after a short-term soft patch caused by lingering tariff effects. The potential for upside surprise remains high and US recession risk low.”

Ms Wood identified credit markets as a standout performer in 2025, and she sees ongoing potential, particularly closer to home.

“We see compelling opportunities in the Australian credit market. Ongoing market development has created pockets of value, supported by increasing breadth and depth across sectors. Both domestic and offshore issuers are drawn to the Australian market by its limited execution risk, even for larger transactions.”

The next phase of the cycle will reward active, tactical positioning.

“As we approach 2026, global markets are contending with a complex and evolving macro landscape. The post-COVID recovery has revealed a shift – economic growth cycles are no longer synchronised and divergence is becoming the norm,” Ms Wood says.

“In this new regime, active risk management becomes essential. Structural shifts are creating winners and losers across asset classes and regions.”

Martin Conlon, head of Australian equities, said today’s markets reflect deep structural imbalances created by network economics and rising government deficits.

“This era has created an environment where disequilibrium has become the norm. Traditional economic forces that historically corrected imbalances are proving less effective, creating both risk and opportunity for investors,” Mr Conlon said.

“The markets we’re seeing today are unlike those of the past. Large companies now dominate global networks, generating extraordinary profits with minimal tangible assets or workforce. The rise of AI is shifting competitive dynamics globally, and this is driving new market behaviours and valuations.”

While Australia is influenced by these global trends, Mr Conlon highlights that the local equity landscape is uniquely shaped by three key sectors: mining, financial services, and construction.

“The extraction of raw materials is a small but crucial sector globally, but it is much larger in Australia. Our financial services sector is oversized due to Australia’s appetite for housing debt and its large superannuation system. And as a high-immigration country, construction represents a much larger share of our economy than in almost any other developed market,” Mr Conlon says.

“The fate of these sectors will always have a disproportionate impact on returns for Australian investors.”

In this environment, Mr Conlon says the market remains one of aggressive yet uneven valuations.

 “Often, the companies commanding the highest prices are not the ones with the strongest fundamentals. Short-term earnings growth and hype around sectors like defence, critical minerals, and AI are drawing far more attention than long-term business sustainability,” Mr Conlon says.

“In markets where speed and overreaction are often mistaken for efficiency, careful, considered investing is increasingly proving its worth.”

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Sebastian Mullins

As global markets reach the midpoint of 2025, a complex and uncertain macroeconomic landscape is fuelling volatility fatigue, according to Schroders, in a new outlook released last week.

The outlook suggests that investors are increasingly ignoring the ongoing geopolitical risk, economic volatility, and policy uncertainty, and instead are choosing to look to fundamentals in an environment where stretched valuations, policy divergence, and asset price inflation dominate the narrative.

Global macro: markets muddle through murky fundamentals

Despite headlines dominated by trade tensions, inflation divergence, and geopolitical uncertainty, global markets have shown remarkable resilience. The current rally has occurred largely without excess sentiment or broad participation, pointing instead to a defensive reweighting toward neutral positioning, says Sebastian Mullins, head of multi-asset & fixed income at Schroders.

While ceasefires and tentative trade agreements have eased some short-term concerns, structural issues remain. Sluggish global growth, fiscal stimulus without productivity reform, and an embattled US Federal Reserve all contribute to a highly uncertain outlook. Inflation remains contained for now, but the potential for fiscal-driven yield curve steepening is growing, particularly in the US.

“Markets are no longer reacting sharply to geopolitical developments, they’re fatigued,” said Mr Mullins. “This leaves us uncomfortably neutral across all asset classes, as valuations remained stretched and expected returns remain muted. But the cycle remains intact, albeit uncomfortably slowing.”

Australian macro: short-term strength, long-term questions

In Australia, the macro backdrop remains stable and supportive in the short term. Inflation is moderating towards the Reserve Bank of Australia’s (RBA) target, and growth remains resilient (though private sector activity is weak), despite the RBA holding interest rates this month.

The upcoming August reporting season is anticipated to provide further insights into corporate performance and expectations for the year ahead. However, questions remain about the sustainability of these dynamics.

“Australia, like much of the developed world, is grappling with stagnating productivity growth and GDP per capita,” said Martin Conlon, head of Australian equities.

“Fiscal imbalances are obvious, with governments showing little intention of aligning spending with tax revenues. While equity markets benefit from their relative size and liquidity, bond markets become volatile. We’ve seen the gap between earnings yields and bond yields reach concerning levels – this reflects a market environment where asset prices are increasingly detached from economic reality.

“Asset prices continue to outpace wage growth, leading to increased wealth for asset owners and a widening divide with the rest of the population. The Australian economy is heavily leveraged, with property prices now four times the country’s GDP, raising concerns about affordability, resource misallocation, and long-term growth prospects. Lower interest rates are unlikely to stimulate productive investment, given capacity constraints in sectors like housing and infrastructure, and instead risk fuelling further asset price inflation,” added Mr Conlon.

Fixed income: a positive outlook for 2025

Yield curves are steepening globally, particularly in the US, as inflation approaches central bank targets and fiscal concerns grow. A potential change in leadership at the Federal Reserve could accelerate this trend, embedding a higher term premium in long-dated bonds.

“The Australian fixed income market has benefited from a stable macro environment, with strong demand for new issuance and average deal subscription levels around 3.8 times covered. Execution risk for new issuance remains very low, and the market is still catching up to Euro and US credit spreads. The July interest rate hold, subdued growth, and softening inflation underpin a positive outlook for fixed income performance through year end,” said Kellie Wood, head of fixed income.

Multi-asset: neutral positioning amid uncertainty

The stance in multi-asset is broadly neutral across all asset classes, reflecting stretched valuations and muted expected returns. While the economic cycle is slowing, it remains intact, and the persistent volatility and policy uncertainty make it difficult to take strong directional views. Globally, equity markets have rebounded sharply from earlier lows, with the S&P 500 rising over 25% from April to June despite ongoing geopolitical risks and muted investor sentiment.

“Most investors have only moved to neutral positioning, and excessive gains across asset classes are considered unlikely given the prevailing macro and policy uncertainty. Short-term volatility is expected to persist, and asset allocation decisions are likely to remain cautious, with investors wary of headline-driven moves and stretched valuations,” said Adam Kibble, portfolio manager.

Credit: strong demand for local securities

In Australia, the credit environment is characterised by healthy demand, solid corporate fundamentals, and a favourable technical backdrop. Corporate balance sheets are solid, with robust margins, especially among infrastructure and utility companies, which are favoured for transparent cash flows and low earnings volatility.

Activity in the subordinated corporate space is increasing, with recent hybrid and Tier 2 issuances. Since March, Tier 2 paper has underperformed senior debt, with some spread widening due to supply in late May and early June, but this was largely retraced as supply diminished and geopolitical tensions rose.

While the US credit market is becoming increasingly expensive and susceptible to volatility, Helen Mason, portfolio manager, believes that strong demand for Australian securities is expected to help mitigate some of this risk, especially with a projected decrease in Tier 2 supply in the second half of the year.

“The credit market has recovered, but the outlook is one of caution due to the potential for further market swings and an uncertain policy backdrop. Investors are advised to remain vigilant, as the environment is likely to remain volatile and sensitive to shifts in fiscal and monetary policy,” said Ms Mason.

Australian equities: fundamentals under pressure

Investors face a challenging environment where valuation discipline and a focus on fundamentals are increasingly difficult to maintain amid regulatory and market pressures, according to Mr Conlon.

“The Your Future Your Super regime and the rise of passive investing have redefined ‘risk’ as simply not holding enough of the largest index constituents, such as CBA. This has meant CBA being bought at ever-higher valuations, regardless of its fundamental value, exposing investors to almost certain loss.

“This distortion is not limited to CBA. The market’s obsession with businesses that employ minimal capital and promise rapid economic value creation, with little regard for business duration, is detached from economic reality and history. Companies have become skilled at offsetting current bad news with future optimism.

“The market’s fixation on revenue growth and momentum leaves opportunities in more mundane sectors, such as energy and materials, largely ignored, except for gold. We see abundant opportunity in these less fashionable corners of the market,” said Mr Conlon.

“We remain committed to a disciplined, risk-adjusted approach to value creation, even as market forces and policy settings make this increasingly uncomfortable. We will continue to seek out opportunities where the crowd is not looking, and to resist the pressure to follow the herd into overvalued territory,” added Mr Conlon.

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Sebastian Mullins

Growth expectations have significantly declined as the market adjusts to the implications of a potential ‘full-blown Trump’ presidency. Are there idiosyncratic factors at play, or is this the start of a Trump-cession? 

Market Outlook

The equity market rallied post inauguration as the market anticipated a more subdued Trump presidency, quickly pricing in all the positives of Trump’s policies of tax cuts and deregulation, seemingly ignoring the protectionist policies of immigration and trade. Only a month later, equities are selling off as Trump moved ahead with tariffs on the US’ three largest trading partners – 25% on Mexico & Canada and 20% on China (up from 10% at the start of the month). The S&P 500 fell 4.6% peak-to-trough during February, and now down 6% at the time of writing.

Investors are now grappling with whether they should be pricing a ’partial Trump’ or a ’full blown Trump’ presidency, which will have very different outcomes on the global economy and markets.

The aggressive policy mix under a potential ’full blown Trump‘ administration could lead to notable differences for the US economy compared to the rest of the world. Factors such as weakened trade, stalled investment decisions, and a general shock to consumer confidence are expected to drive many economies toward recession, leading to significant interest rate cuts globally. However, for the US, this policy mix could result in stagflation, where diminished growth coincides with rising inflation. The Peterson Institute estimates that an additional 10% import tariff across all goods might temporarily add about one percentage point to US inflation. Efforts to stimulate demand through large fiscal measures may soon confront a deteriorating supply side, compounded by higher tariffs that could further exacerbate goods inflation. This could push the US economy’s potential growth rate down to 1.5%, with a potential technical recession in between, before stimulus ultimately boosts growth heading into 2026.

Early indicators suggest these risks may be already occurring. Consumers are reportedly reacting negatively to uncertainty and higher price expectations, which could lead to reduced spending, while long-term inflation expectations are creeping up. This predicament will pose challenges for the Federal Reserve (Fed), which may find itself unable to adjust monetary policy in response to the stagflation, especially as other central banks are expected to lower their interest rates in 2025. Consequently, this could lead to a stronger dollar, as the Fed maintains its stance amidst rising inflationary pressures, complicating economic management and potentially inviting further criticism from the president.

Depending what kind of Trump we end up with, the outcome is either hikes due to a turbo-charged economy, or cuts due to a self-imposed Trump-cession. The market is currently pricing in another rate cut by June, with 100bps of total cuts between now and the end of 2026. The divergence in potential outcomes is extreme. While we can’t predict Trump, we can see what impact his policies are currently having. The recent -2.8% GDP Nowcast by the Atlanta Fed, suggests we’re already in the throes of recession.

However, this contraction is almost entirely driven by the recent surge in imports. This is similar to March 2022 when supply chain relief post-COVID led to a similar flood of imports. There are two explanations for this. Firstly, this could be due to tariff front-running, where businesses look to import as much as possible before tariffs go into effect. If this is the case, then this will be offset in inventories, either in the official GDP print or as an offsetting boost the following quarter. The second cause could be the recent uptick in physical gold imports into the US. Most investors trade gold futures on COMEX, which requires delivery at maturity. Given talk of a potential 10% tariff on all goods, gold traders front ran physical gold imports to ensure they had sufficient supply. Goldman Sachs assumes this accounts for USD $30bn of gold imports, relative to the usual sub-$5bn. This would not be included in the official GDP print as it will be offset by investments. For reference, the New York Fed’s Nowcast is still pointing to a strong 2.9% as at the end of February.

Now that’s not to say there wasn’t genuine weakness in the data. Personal consumption expenditure, which has been leading growth over the prior quarters, collapsed to 0%. This can be partly explained by big swings in durable goods, mostly vehicle purchases after the Californian wildfires, but is still concerning. The recent manufacturing PMI also pointed to weakness, with the employment index dropping down to 47.6 and new orders dropping to 48.6, all while prices paid increased to 62.4.

Our base case remains that the market was too sanguine post-inauguration and the reality is that growth and inflation (and by extension, markets) will be in a state of flux this year as investors try to grapple with Trump’s policies. We believe growth will slow this year, but only to trend or slightly below, before rebounding. Recession is not our base case. However, the risk remains that sequential dents to confidence leads to a loss of animal spirits which ultimately causes a deeper slowdown. All eyes will be on services PMIs and non farm payrolls to see potential confirmation of weakening.

Portfolio changes

We continue to favour equities as our preferred asset class, but remain cautious over a 1-3 month horizon. Over the month of February, we reduced equities by over 4%, ending the month at 33% delta-adjusted. Throughout the month we sold 3% from US equities, 0.5% from EU, Japan and US energy equities, along with our put options getting closer to being in the money. We added 1% to emerging market equities over the month. We believe China requires fiscal stimulus to revive its economy, as weak demand and tariff threats remain a headwind. However, the recent speech from Xi with Jack Ma points to a positive turn in the equity markets. Seemingly moving away from ‘Common Prosperity’, Xi announced removal of fines and a creation of an equal playing field between private and state-owned enterprises. We believe this will allow equities to re-rate higher, but we remain patient and wait for further information on stimulus before getting more excited. We continue to hold 10% notional in March S&P 500 5900-5300 put spreads, which are at the money at the end of February.

In credit, we took some profit on our Australian investment grade position after spreads tightened from 74bps to 62bps. This saw our overall credit allocation drop by 2%. We continue to favour Australian and European corporate credit, along with Australian and US securitised credit, but continue to shun US corporates in both investment grade and high yield.

In currencies, we reduced our foreign currency position by 2% by selling some of our long US Dollar (USD) position. We added to Japanese Yen (JPY) and British Pounds (GBP), but at the expense of the Euro (EUR). We are short-term cautious as USD weakness could continue. However, given our view on growth and inflation in the US, along with the potential for the Fed to be on pause and even perhaps having to hike in 2026, we remain positive on the USD medium term. We have upgraded our AUD outlook to neutral. With almost three rate cuts priced in for 2025, we don’t think there’s much downside to front end yields to drive the AUD further lower. We continue to like the JPY given cheap valuations, the strong growth and inflation outlook, and the potential for further hikes by the Bank of Japan. We prefer to play long JPY with short Euro (EUR) to lessen the carry alongside our view of tariff risks to the European economy.

Our duration position remains unchanged at the headline level at 1.85 years, but we adjusted our positions under the surface. We took profit on our front end Australian bond position, selling 0.3 years. We have held this position from when markets were only pricing in 1.5 rate cuts for 2025 and took profit once four rate cuts were priced. We shifted this duration over to the US, where we believed a potential growth slowdown would benefit government bonds. Most of this was in the belly and back end of the curve to trim our steepener position. Similarly, we trimmed out steepener position in Germany by shifting 0.15 years duration from the front end to the back end of the curve. Finally, we added 0.125 years to German inflation breakevens, as inflation remains sticky across the Eurozone. We continue to hold inflation protection in the US and Australia.

By Sebastian Mullins, head of multi-asset and fixed income

The post Crash landing? appeared first on AdviserVoice.

Kellie Wood

For investors seeking stability and income, the expected moderation in inflation could create opportunities for fixed income investments, while US equities are likely to perform well under a Trump administration and small cap stocks could continue to catch up to larger companies, according to Schroders portfolio managers.

“Investors should be prepared for a landscape where bonds may not only serve as a safe haven, but also as a source of income amidst fluctuating equity markets,” said Kellie Wood, head of fixed income, Australia, at Schroders.

“As we shift to a new investment regime involving higher inflation and greater macroeconomic volatility, fixed income’s defensiveness is likely to be useful in different ways compared to past decades. The key roles of fixed income will be to generate income, and to provide shelter in a weakening global economy.”  

According to Ms Wood, higher bond yields should improve fixed income returns compared to equities, which, along with higher cyclical risk in equities given relatively high valuations, could result in a flatter efficient frontier.

“60/40 portfolios are arguably challenged by the possible correlation shift. This argues for a strong role for fixed income as an income generator.”

She said the key shift for investors in fixed income allocations is likely to involve lower duration bonds, absolute return strategies and high income products investing in diversified credit. 

“We retain a mildly positive view on global duration. While the macro backdrop has become less favourable, it is also true that bond valuations have improved significantly over the fourth quarter, as markets now price a less aggressive profile for interest rate cuts from the US Federal Reserve, which has pushed up Treasury yields.”  

Schroders is most cautious on the US, retaining a preference for European and Australian bonds, where the macroeconomic environment is more conducive for interest rates to decline and bond prices to rise. 

“We continue to hold inflation protection via inflation-linked bonds in both the US and Australia. These positions offer some protection for a more permanent move to a higher for longer environment where inflation could remain stuck above central bank targets as growth stays elevated,” Ms Wood said.

In terms of interest rate cuts, Ms Wood points to sticky inflation: “This sets up the Reserve Bank to undertake later and shallower rate cuts than our peers, underpinning sustained yield support for Australian fixed income assets over the near and medium term given attractive valuations and a supportive cycle,” she said.

Meanwhile, an incoming Trump administration could lead to a period of strong economic growth in the US, potentially outpacing inflation, according to Sebastian Mullins, head of multi-asset and fixed income at Schroders.

“The US economy has surprised expectations in 2024, and the incoming Trump administration’s policies may be about to put the US Federal Reserve in a very tight spot. Investors will need to question whether his pro-growth policies will be enough to offset the inflationary forces of his protectionist agenda,” Mr Mullins said.

“We believe 2025 will be another year of US exceptionalism. Growth is likely to remain strong as other economies stumble out of their doldrums. We are cautious that inflation is likely to rise and will create volatility, arguing for more active asset allocation and stock selection as markets decipher the winners and losers of these new policies,”  he said.

Mr Mullins is also optimistic about US equities due to the expected policies of the new Trump administration, which could lead to even higher nominal GDP growth in 2025. However, Mr Mullins is also cautions that inflation could re-emerge and create volatility in the market. He suggests that active asset allocation and stock selection will be crucial to navigate this environment.  

“Investors would be wise to be more active in their asset allocation and more prudent in their stock selection. From a more strategic standpoint, this will result in pro-cyclical or unstable correlations between bonds and equities, which reduces fixed income’s diversification benefits through time.

The key role of fixed income will be to provide high quality income, and to provide shelter in a weakening global economy. In the most basic sense, the efficient frontier is likely to bear flatten, as the returns of bonds is higher but the diversification benefit reduces,” Mr Mullins said.

Mr Mullins predicts a continuation of the US rotation trade in 2025, with more cyclical companies catching up with the ‘Magnificent Seven’. He suggests investing in the Equal Weight S&P 500 as a way to play this theme, as it has a higher weighting in sectors like industrials and financials and less in technology and communications.

“US small companies likely have further room to run, but we prefer to play this theme with the Equal Weight S&P 500, which has a higher weight to sectors like industrials and financials and less in the technology and communication sectors. This is not to say we’re against the ‘Magnificent Seven’, they are phenomenal companies with margins almost double the S&P 500, but we argue for careful stock selection through active management in this space,” he said.

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Due to the structural changes to these teams, Stuart Dear will leave Schroders after 11 years with the business.  He was most recently the head of Australian fixed income, a role he held since July 2021. Mr Dear leaves Schroders Australia with the team’s very best wishes for his future success.

Schroders Australia CEO, Simon Doyle, said Mr Mullins and Ms Wood are solid investment leaders with strong track records, are well known to the market and will work closely to lead this combined team.

“In making these adjustments to the Fixed Income and Multi-Asset team structure and leadership, we believe we are positioning ourselves for future success in these two important asset classes, to which we remain firmly committed.  Sebastian is a talented investor and natural leader. Having worked closely with Sebastian in the Multi-Asset team, I’m confident he will continue to deliver exceptional investment outcomes for our clients.  He will be a strong, future-focussed head of the combined multi-asset and fixed income capability.

“Kellie’s promotion is also well deserved, and her passion for fixed income and her talent as a fixed income investor is rewarded with this opportunity. Sebastian and Kellie are supported by 13 investment professionals within the merged local team and the Schroders global investment teams of over 400 investment professionals in numerous countries.

“Schroders is optimistic about the outlook for these asset classes and remains committed to delivering active fixed income and multi-asset solutions to our clients in Australia and New Zealand. These changes seek to ensure we are making the best use of our local resources and signify our strong commitment to providing leading investment solutions tailored to our clients’ needs.

“Schroders has an expansive global investment platform and presence in 38 locations.  In Australia, we have a long-standing 60-year commitment to serving and partnering with clients through locally based investment manufacturing capabilities in equities, fixed income, multi-asset, and private assets.  We are uniquely positioned to assist Australian clients to solve their investment challenges.”

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Sebastian Mullins

Global and Australian economies and markets are holding up better than was expected just four months ago, according to the Schroders Australia investment team, but that doesn’t mean the good times will last forever.

“The surprise of the past four months is that the Australian economy in general, and businesses in general, have held up better than people expected in the face of higher interest rates. This was particularly the case across the retail sector, where the pointy end of economic slowdown is normally felt as consumers tighten their belts. It really wasn’t as bad as it could have been,” said Martin Conlon, head of Australian equities at Schroders Australia.

Sebastian Mullins, head of multi-asset at Schroders Australia, added that the discussion in the US around what kind of ‘landing’ for the economy and markets was expected has also shifted.

“Now the discussion is around how strong the US economy is and that’s caused our economics team in London to increase their forecast for US growth from a low of 1.3 per cent for this year, up to 2.7 per cent,” Mullins said.

“Rather than having a crash landing or a hard or soft landing we have a reacceleration in the US. It’s almost like when a pilot aborts a landing on an airplane, you have to reaccelerate before you try and land a second time.”

In other global opportunities Mullins pointed to Japan, even though it is in a technical recession.

“We do like that economy because the equity market still looks cheap and there are structural reasons for it to do well,” he said.

“We also like other asset classes like Australian credit. That’s giving a pretty healthy yield for the high quality.” Noting that spreads are high relative to their own history and against global corporate spreads.

However, Conlon said caution is needed around some of the very high valuations for the AI and tech related companies.

“I still believe ‘That it’s different this time’ are some of the most dangerous words in investment and the reality of market valuation levels, particularly in the US market, are high by historic standards and they are very high relative to interest rates,” he said.

With the US representing close to 70 per cent of the global market cap – with approximately 30 to 40 per cent of that market in tech and communications – but only about 18 per cent of global GDP, there are some obvious overexposures for not just the US but all international investors.

“There is a big presumption there that the profit growth of particularly those big technology companies is going to keep on growing, and it’s going to be durable forever. And when the companies underlying that position are, for the most part, global monopolies, I think that can be a sign of complacency. Those numbers and valuations give me a lot of pause for thought,” Conlon says.

But that doesn’t mean that tech and communications, and AI in particularly, aren’t worthy of investment.

“I am a believer that AI is going to do a lot of wonderful stuff. But I think, as I alluded to earlier, the profit projections of where, and how it’s going to change the profit pools of the world, are probably running ahead of what is most likely to happen,” Conlon said.

Mullins concurred, but cautioned against ignoring the Magnificent Seven just on AI valuation concerns.

“Earnings in these stocks have continued to beat expectations because their current business models have been delivering, very little AI earnings can be attributed to current results,” noting they have double the margins and have grown free cash flow twice as fast as the other 493 stocks in the S&P 500.

“While its likely these stocks pull back after a strong rally, it’s premature to call them a bubble,” he said..

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Simon Doyle

Traditional asset allocation may not suit the new world of higher interest rates and higher inflation and a more dynamic approach to portfolio construction will be required to generate attractive returns as stock markets come under pressure, according to Schroders Australia.

The ability to move between different asset classes will be a key to boosting portfolio performance and helping provide downside protection, as returns from share markets fall from their highs of recent years, according to Simon Doyle, CEO and CIO for Schroders in Australia.

“We think inflation will be generally higher and more difficult to keep close to 2 per cent. Share markets are likely to be more volatile than investors have been used to over the past few years as the world changes,” Mr Doyle said.

He predicts the returns from Australian shares over the next three years will sit just below 7 per cent a year, compared to a historical average of 8 to 10 per cent.

“Australia is looking better than the United States (US), which still looks quite challenged from a valuation perspective. There is potential for more downside in the US in the short term. We are positive structurally on commodities, which could be a source of upside return for Australia’s share market, which is one of our preferred share markets.”

According to Doyle, the world has been living in an age of abundance but, due to several converging forces, has moved into an age of scarcity, with no more cheap labour or cheap energy and with higher interest rates increasing the cost of capital. 

“We believe this will lead to greater cyclical and market volatility,  which has significant implications for investment markets and more importantly, the investment framework investors use to build portfolios,” said Doyle.

“Active management and asset allocation will become more important than it has been in the past.”

“In the current environment, asset breadth is good, backed up by active management, to allow investors to navigate a more challenging path forward – but also a rewarding one if investors get it right.”

Sebastian Mullins, head of multi-asset in Australia, says higher inflation and higher rates will affect asset allocation directly.

“These conditions of higher inflation and interest rates will demand more active tactical asset allocation in portfolio construction. As the cost of capital rises, company earnings will be under greater pressure.” 

“We have adopted a value bias, and favour companies which we consider to have cheaper multiples and quality, inflation linked earnings. Those with extreme valuations will likely come under pressure,” said Mr Mullins.

“When it comes to duration, being more active in terms of which country, duration selection and currency selection will matter.”

Mr Mullins said investors will also need to adopt a more flexible approach to portfolio construction. 

“The way investors implement a 60:40 portfolio is important – and that comes down to the risk tolerance of an investor and their adviser. From our perspective, it is about being more dynamic and knowing when to add more or less to a portfolio There are some great opportunities in both the 60 and the 40 for active investors.”

“If you are stuck in the 60:40 regime, what you put in the 40 per cent will depend on the economic environment. But the yield being offered on that 40 per cent is a lot higher than it has been in the past, and if you are a retiree, you want to access that yield. There are good opportunities to increase the yield aspect of your portfolio in this higher inflation environment,” Mr Mullins said.

The Schroder Real Return Fund is a multi-asset fund providing diversified exposure across defensive, growth and alternative assets. This actively managed fund aims to achieve a return of CPI* plus 4 per cent to 5 per cent a year before fees over rolling 3-year periods while minimising the size and frequency of negative returns.

By diversifying across a wide range of asset classes, sectors and regions and actively managing the asset allocation, the fund seeks to achieve long-term growth and manage downside risks as markets rise and fall.

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Simon Doyle

Schroders Australia (SIMAL) has appointed Simon Doyle as chief executive officer, alongside his ongoing role of chief investment officer, a position he has held since February 2022.

This is part of an important and future-focused evolution of the Australian business, reinforcing Schroders’ commitment to being investment-first and insight-led. Schroders recognises the critical importance and value of our investment proposition to clients and the need to tailor our capabilities to help solve their specific needs.

Simon succeeds Sam Hallinan who has led the Australian business since April 2021 through a period of significant industry change and societal disruption. We are grateful for the contribution Sam made to Schroders during this period and he leaves with our best wishes.

Simon is a deeply experienced investor with over 20 years of experience at Schroders alone, having joined the business in 2003. During his tenure Simon has successfully developed and managed our Fixed Income, Multi-Asset, and Private Debt teams. Simon will continue in his investment role as CIO alongside a deeply experienced team of investment professionals who lead our locally-manufactured capabilities, including Australian equities under Martin Conlon and Andrew Fleming, fixed income under Stuart Dear and Kellie Wood and private debt under Nicole Kidd.

In addition, we are announcing the promotion of Sebastian Mullins to the role of head of multi-asset. Sebastian has served as deputy head of multi-asset since February 2022, having joined Schroders in 2019. He has 12 years of multi-asset investing and will lead a team of deeply experienced investment professionals. Over time we expect to recruit additional talent into the multi-asset team.

Commenting on Simon’s appointment, Chris Durack, head of Schroders Asia Pacific, said, “Simon’s new dual CEO and CIO role reflects our ongoing commitment to helping solve for our clients by being an investment-first and insight-led business in Australia, and allows for further direct engagement on investment solutions with our clients, the needs of whom are becoming increasingly complex. Simon is highly regarded internally both locally and globally across the Schroders business and is well-known within the market and amongst our clients.”

Peter Harrison, global chief executive officer for Schroders, said: “These leadership changes signify our unwavering commitment to providing exceptional investment solutions tailored to our clients’ specific needs. Under Simon’s leadership, and with an investment-led approach supported by our locally-based investment teams, we are confident in our ability to continue delivering outstanding results for our clients.”

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