We remain positive on markets but recommend active management to reduce increasing risk in portfolios
Key points
The major themes dominating markets are:
- Strong returns driven by optimism on Artificial Intelligence (AI) prospects, lower US interest rates, strong corporate profit results and a truce in China-US trade tensions
- Global market share indexes are expected to reflect increased earnings from stocks other than the Magnificent 7 (a cohort of the biggest US technology businesses) in late 2025 and 2026.
- Opportunities continue outside the US share market and in other asset classes including emerging markets, global listed infrastructure and global listed property.
Returns of major asset classes to 31 October 2025
The rally in all asset classes since May has continued with solid calendar year to date (CYTD) returns for both shares and bonds. The returns on growth assets have been exceptional over the last 3 years.
Global shares CYTD have delivered very strong returns. US large cap share prices have made new historic highs with the Magnificent 7 representing 69% of the increase in profits over the past year according to FactSet. The high Australian dollar reduced returns in AUD.
Emerging markets delivered impressive returns for the quarter and CYTD led by strong returns from Asian share markets.
Australian shares generated good returns with the Resources sector a key driver. Small cap stocks provided impressive returns for the quarter and year to date. Listed property also performed well. Both sectors benefitted from the RBA interest rate cut in August.
Australian and global bonds (hedged) delivered solid returns CYTD and outperformed the cash rate.
|
Asset Class % |
CYTD |
3 months |
6 months |
1 year |
Ann.3 year |
Ann. 5 Year |
Ann.10 year |
|
Global Shares in USD |
21.5 |
8.7 |
21.9 |
23.2 |
22.2 |
15.1 |
11.9 |
|
Global Shares in AU |
14.9 |
6.9 |
19.1 |
23.3 |
21.3 |
16.8 |
12.8 |
|
US Shares in AU |
11.2 |
6.4 |
20.8 |
21.5 |
21.7 |
19.3 |
15.6 |
|
Emerging Markets in AU |
26.2 |
13.8 |
27.5 |
28.7 |
21.5 |
9.8 |
9.5 |
|
Australian Shares |
11.9 |
2.7 |
11.1 |
12.5 |
13.1 |
12.6 |
9.7 |
|
Australian Small Companies |
25.1 |
14.3 |
25.3 |
22.8 |
13.9 |
9.6 |
9.1 |
|
Australian Listed Property |
11.4 |
1.8 |
12.5 |
7.4 |
16.4 |
12.1 |
8.2 |
|
Australian Bonds |
4.8 |
0.8 |
1.7 |
6.5 |
4.1 |
-0.2 |
2.1 |
|
Global Bonds (Hedged AUD) |
4.5 |
1.9 |
2.3 |
4.8 |
4.4 |
-0.4 |
2.0 |
Source: FE Analytics
Outlook for economies and markets
Our base case for the next 6 months is that the share market will sustain its optimism with the odds of recession quite low. For the US, this is supported by an accommodative Federal Reserve, strong AI capex, a pro-growth policy agenda and high liquidity levels.
The key issue for investors is that while most large cap equity (and credit) markets are expensive, the indexes for US and Australia, which dominate portfolios, are at extreme levels; highly concentrated and with growth above earnings expectations.
This means that over the next few years we expect market returns to be lower.
We are positive on growth assets but focussed on active management and in sub asset classes where we see value and are better positioned for this stage of the cycle.
Australia’s prospects are vulnerable to tensions between China and the US, and the reduced likelihood of further RBA rate cuts going forward.
Conclusion
Our preferred approach in times of uncertainty remains:
- Continue to be diversified by asset classes.
- Remain flexible and incorporate active management.
- Bonds and high-quality credit for income and stability.
- Regular rebalancing to maintain target allocations.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
