Global financial markets were mixed in the final quarter of 2025. The interest rate cycle changed, RBA cash rate expectations reversed, and the long-bond yield rose sharply. Mineral commodities were generally strong which pushed the Australian dollar higher, but share markets flattened off after a solid period.
In the United States markets largely ignored the rising cacophony from the White House, believing the tariff rhetoric and geopolitical rumblings to be just that, and the Federal Reserve provided some stimulus with successive rate cuts.
The most talked about topic for the year was artificial intelligence, and how it might (or might not) affect markets and economic trends. AI’s evolution is shifting from a fascinating technological innovation to a globally important economic force, with wildly varying expectations of adoption and effect. The boom is full of hyperbole – the big players are now called ‘hyperscalers’ and analysts are almost breathless with excitement.
The capital commitments in data centres, energy, and computational power are staggering, and increasingly funded by debt rather than generated cashflow. Today’s AI related valuations are correspondingly high, representing the present value of expected future profits, after applying an appropriate discount rate. But what if the AI revolution doesn’t lead to significant profit gains? Today’s heady valuations might then prove overly optimistic.
Geopolitics is already a feature of 2026. President Trump’s Western Hemisphere primacy aspirations, with the incursion into Venezuela and his strange preoccupation with Greenland sets the tone for an extraordinary year. Much of President Trump’s attention will now be focused on the November 3rd mid-term elections, and the power retention (or not) that follows. Meanwhile, Europe seems to be tiring of its sycophantic approach to President Trump’s antics, and might not be so conciliatory this year, whilst China’s technological prowess, (notably in EV, DeepSeek and energy applications) is expanding their economic influence and underpinning their export economy. A fascinating year ahead, to be sure, and one where market participants and observers might be wise to keep a wary look over their shoulder.
But of late, markets have surprisingly been shrugging off the geopolitical turmoil… though the recent spike in long-bond yield and higher metal prices indicate rising risk awareness and some apprehension.
Australian Shares
The Australian stock market, as measured by the S&P/ASX 200 fell by 1.5% in the December quarter, but managed to rise by 6.8% for the 2025 year. Dividends added a further 3.4% such that the total return for the year was solid in Australia but lagged the performance of most other world stock markets.
A key feature of 2025 was individual stock price volatility – the overall index rose moderately, but many stocks experience outsized price gyrations. This is a permanent feature of markets, caused by more commonly used algorithmic trading. There are some good examples to note. CSL, which in 2020 briefly held the mantle of our biggest company, fell by 38% in 2025 as investors rotated from pandemic benefited health stocks to technology and minerals. CBA touched $192 in late June but subsequently fell 19% whilst BHP enjoyed a staggering recent rally to $48, having touched a low below $34 in April.
These examples are the mega companies – the smaller ones were even more volatile, particularly coincident with profit or guidance statement release dates. The stock market mechanics have a cascading price propensity – when a price moves substantively, it triggers an algorithmic momentum flow that can be very rapid and often whipsaw the other direction just as quickly. Investors need to be aware of volatility and not be too concerned about very short-term price movements.
Australian shares are trading at valuation multiples higher than the norm, noting an elevated price/earnings ratio of about 20x. Dividend payments are rising modestly but the average dividend yield is only 3.3%, somewhat lower than usual. Share buybacks abound, indicating a capital management pivot whilst credit markets remain accommodating. Companies can borrow (sometimes from private credit), use these funds to purchase and cancel their own shares, then (hope to) increase the earnings per share for remaining shareholders, and convince themselves that this is the most prudent application of shareholders’ capital. What could go wrong?
The Australian economy is ticking along satisfactorily, albeit with some positive and negative trends. Inflation (and living costs generally) remain elevated, meaning the RBA is not likely to reduce rates further, but consumer confidence and spending has increased, and construction activity (commercial, mining and housing) is strong. There is a domestic productivity problem, meaning the cost of input (labour and capital) is rising more quickly than the resultant outputs. This may constrain economic growth and thereby crimp corporate profit growth in the coming years.
Commodity price movements are worthy of comment. Energy prices, (oil & gas, LNG and coal) have been generally weak, driven by an oversupply and transitioning generation sources. By consequence, the share prices of the project rich domestic producers Woodside and Santos have underwhelmed. Iron ore meanwhile has defied most expectations by holding above US$100t, a boon for our economy, particularly Western Australia. Lithium, (though much maligned) has staged a strong recovery, the price doubling in a blink and precious metals have been very strong, driven largely by speculation. In all, the higher commodity prices are good for the Australian economy by bolstering GDP and government revenues and underpinning better profit projections for mining industry corporations.
Looking ahead, the RBA won’t provide any further interest rate stimulus any time soon, but commodity prices are strong and domestic economic activity satisfactory, so corporate profits and dividends will likely be positive. But domestic considerations are less relevant than leads from overseas, which are likely to cause some further market shocks this year. Investors should keep some dry powder.
International Shares
In the December quarter the MSCI world stock market index rose by 2.9%, a decelerating rate of growth when compared to the prior periods.
These steadier markets gains followed an elevated ‘risk on’ period, characterised by the flighty valuations ascribed to AI and some technology sectors. More recently the AI investor exuberance has fatigued with a noticeable rotation to commodity, material, infrastructure and utility stocks globally. There was a trend away from mega-caps with slackening performance from the much-vaunted US magnificent seven, and outperformance from smaller companies, emerging markets and non-US stocks generally.
Asian markets had an excellent 2025, the Hong Kong index up 27%, Singapore 17% and Japan 26% benefitting from a prior period of undervaluation and a rotation from the United States. The leading AI related and semiconductor stocks in Korea and Taiwan caught global enthusiasm for these sectors. China’s export boom has shifted to more technologically advanced products including hybrid and electric vehicles, as sector in which they are rapidly increasing global market share.
Continental European shares performed similarly well - Germany up by 23%, and Italy’s 31% the standout, being a beneficiary of increased Eurozone defence industry spending, slackening inflation and the European Central Bank’s stimulatory 2.15% cash rate target. It’s interesting...... Italy’s credit rating is BBB+, their government debt to GDP an eye-watering 135% yet their long-term bond yield has rallied to just 3.4%. Meanwhile, in Australia, our credit rating is AAA, our debt to GDP 43% yet our bonds yield an appealing 4.75%. I know which fixed interest market I prefer!
British shares also had a great year in 2025, up by 21%. The market benefitted from a weaker pound (against the Euro), rising commodity prices, a ramp up in defence spending and six interest rate cuts by the Bank of England in this easing cycle.
Looking ahead, one can’t contemplate the likely direction of markets without due consideration to the probability of more geopolitical turmoil, the inexorable global build-up of sovereign indebtedness and the ‘we don’t care about debt and deficits’ attitude that currently pervades markets and politicians. Last April, markets suffered a severe (but thankfully short lasting) wallop due to President Trump’s so called ‘liberation day’ tariff pronouncements. There’ll inevitably be another market correction this year (there almost always is) but I think whatever causes this next market black eye might prove more difficult to bounce straight back from. A buying opportunity waits for those with patience.
Property Securities
The performance of listed Real Estate Investment Trusts (REITs) ended 2025 on a weaker note, prices declining by 2.4% in the December quarter, but the capital return for the full year was positive 5.8%, bolstered by a further 4% average distribution.
The commercial, retail and industrial sectors have now passed the post-pandemic turning point with stabilisation in valuation and occupancy, and some green shoots of growth. Successive RBA interest rate cuts have helped improve the macro climate, and some REITs closed the hitherto large gap between their security prices and their net tangible asset value.
The persistent key feature of Australia’s listed property sector is the outsized proportion represented by one stock (Goodman) – a hefty 36% of the index. By consequence, wherever Goodman’s price goes, so does the index. Goodman has been the well-deserved sector darling for a long time, due to their stellar directional decisions and operational performance, and a strong pivot towards data centre construction in recent years. But their miserly distribution yield of just 0.1% means one of the traditional metrics for property investing (yield from rental distributions) doesn’t apply, so Goodman investors are squarely focused on capital growth – much more akin to an ordinary share than a property trust.
The diversified REITs have proved reliable performers. GPT manages $34bn in industrial, retail and office properties and is performing well, and has a distribution yield of 4.3%. Similarly, Scentre Group, the owner of 42 Westfield malls, has proved a solid investment. Scentre has an enviable 99.8% occupancy across its portfolio and recently sold 19.9% of its iconic Sydney CBD property for $864m, representing a capitalization rate of 4.69%, an extremely strong outcome indicative of zero yield premium to long-term bonds.
Australia’s housing market remains undersupplied, but approvals have ticked up suggesting an increase in construction activity ahead. House prices in the major CBD’s are elevated due to the supply/demand imbalance, and lending has increased markedly, suggesting a risk of further deteriorating affordability.
REITs represent a relatively low risk investment in an otherwise volatile marketplace, so we expect solid performance ahead. Recent moves upwards in the bond yield has softened some REIT prices and improved their investment merit, but the sector remains sensitive to interest rate movements.
Interest Rates
Australia’s Reserve Bank has held the official cash interest rate at 3.6% since August and is now indicating the probable conclusion to its relatively shallow 12 month easing cycle. RBA minutes now suggest a possibility that the next move may be upwards.
Andrew Hauser, the RBA Deputy Governor, reiterated their case recently, stating that ‘inflation above 3%, let’s be clear, is too high. We’re charged to keep inflation between two to three per cent and it’s currently above that.’ The inference of this message is that the RBA is concerned about the risk of reemerging inflation and won’t hesitate to act (raise rates) should inflation not abate. It’s also clear that the RBA is not enamored with the publication of monthly inflation data, which can be volatile and problematic, and is focused instead on the more reliable quarterly observations.
Markets have been pricing in the possibility of a rate rise in February (based on the December quarter inflation data), but our view is contrary, believing a longish period of rates on hold is ahead as the RBA considers a variety of data points and a wary contemplation of the risks of some type of global event or shock.
Australian long bond rates meanwhile have risen sharply, breaching 4.8% recently, and breaking out of their 4% to 4.5% trading range. The primary reason for the higher yield is a more hawkish assessment of RBA policy (no more rate cuts), the aforementioned stubborn inflation, coupled with some positive economic trend indicators and some global concerns about new issuance – treasury departments globally are continuing their debt fueled fiscal binge.