Diverging Fortunes | 31 December 2025
The last quarter can be characterized as one of diverging fortunes. For most of the year Australian and US equities have been tracking closely – including the steep fall and quick recovery in markets in April as tariffs were announced and then paused. But November has seen a divergence.
This divergence is linked to differing outlooks for inflation. Markets are now pricing in somewhere between unchanged rates and a potential hike in Australiain 2026, whereas in the US the market is pricing in one to two cuts.
Markets around the world experienced volatility in November, as sentiment in the US turned cautious. Equity valuations in general were seen as stretched, and in particular investors began to worry that perhaps the exuberance around AI was now making that sector frothy. Furthermore, the labour market was displaying weakness while inflation remained elevated.
In Australia, at the end of October, the September quarter inflation print came in much higher than what the markets were expecting. The bond market immediately priced in expectations that interest rates would remain on hold for the greater part of 2026, with the potential that the next rate decision would be an increase.
The central banks followed the playbook the market was expecting. On 9th December, the RBA left the Australian overnight cash rate on hold at 3.6% and confirmed that they expected to stay at that level for some time. The following day the US Federal Reserve cut the Fed Funds rate by 25bps, bringing it into the range of 3.5% to 3.75%, and indicated that the majority view of the Governors of the Federal Reserve was that there would be further cuts in 2026 and 2027.
Despite the wobbles in November and the diverging fortunes between the Australian and US financial markets, it’s been another excellent year for investors in a diversified portfolio. Overall, the Australian market is up by over 10% - higher than the long term average return. International developed markets are up nearly 13%, while the emerging markets have recorded an annual return of 24% (in AUD).
As always, maintaining diversification and discipline remains the most effective way to achieve a rewarding investment experience.
