Insights

Global markets delivered another constructive quarter in December 2025, but the character of the rally shifted meaningfully toward more selective leadership, higher dispersion and growing sensitivity to macro and policy surprises. Equity and bond investors both finished the year with solid gains, yet forward-looking return expectations look more modest as valuations, “soft but slower” growth and only gradual disinflation increasingly dominate the outlook.

Quarter of consolidation, not capitulation. The December quarter extended the advance in risk assets, but with lower headline index returns than earlier in the year and noticeably choppier intra quarter trading ranges. Episodes of profit taking, particularly in crowded A.I. and growth names, punctuated an otherwise constructive backdrop of resilient earnings and still accommodative liquidity.

Non US markets continued to narrow the performance gap to the US, with developed ex US and emerging markets posting robust gains for both the quarter and full year as investors rotated toward cheaper markets supported by weaker US dollar trends and improving local policy settings. The broad global indices thus masked a meaningful internal rotation away from pure US mega cap dominance toward a more regionally balanced, style diverse outcome.

Equities: narrower leadership, wider dispersion. Across global equities, the December quarter saw modest but steady index gains, leaving many benchmarks near record or multi year highs by year end. Cyclicals, select financials and high quality value exposures generally outperformed as investors increasingly demanded clearer earnings visibility and cash flow support in the face of still elevated real policy rates.

A.I. and broader tech themes remained central, but performance within the sector became more mixed, with highly valued, growth names more vulnerable to any back up in yields or disappointment in A.I. spend. By contrast, “picks and shovels” beneficiaries - semiconductors, infrastructure and energy related hardware - remained better supported, particularly in Asia and Europe where domestic policy explicitly favoured digital and industrial capacity investment.

Regionally, Europe and the UK delivered another strong quarter, building on 2025’s rotation in favour of undervalued, internationally exposed franchises leveraged to global demand and elevated commodity prices. Japan continued to benefit from structural reform narratives and ongoing policy normalisation, while emerging markets were again split between A.I./tech aligned exporters and more fragile, fiscally constrained economies.

Australian equities participated in the global grind higher, with resource and income oriented exposures supported by firm commodity prices and the search for yield, even as domestic growth remained subdued. Sector performance continued to rotate away from defensives that had been bid up earlier in the rates cycle toward cyclicals, small companies, and real asset proxies more geared to any stabilisation in domestic conditions.

Fixed income, credit, and real assets. Fixed income markets posted positive, if uneven, returns as 2025 closed, capping one of the strongest years for bonds in over a decade. Longer dated yields remained volatile as curves continued a gradual steepening trend, reflecting the interplay of Fed and Bank of England rate cuts, an on hold European Central Bank, and a persistent rebuilding in the yield premium of long-dated bonds over shorter-dated bonds.

Global bond indices delivered low single digit gains for the quarter, with full year returns supported by the combination of attractive starting yields and the cumulative impact of multiple Fed cuts since mid year. Short-dated bonds outperformed in risk adjusted terms, but the move to a steeper yield curve finally offered investors a more balanced choices across different maturities than in prior years.

Credit remained a bright spot. Investment grade and high yield spreads ground tighter on the back of still contained default expectations, modest net issuance into year end and ongoing demand from multi asset allocators rebalancing from equities after outsized 2025 gains. Emerging market debt, especially in local currency, benefited from a weaker US dollar and better inflation trends, though country specific political and fiscal issues still drove big differences between markets.

Real assets - listed infrastructure, property and select commodity exposures - generally generated positive absolute returns, albeit with greater volatility than earlier in the year as yield moves and policy headlines whipsawed valuations. Industrial metals and energy related commodities held firm on tight supply and continued A.I. infrastructure spending, while gold remained underpinned by still elevated geopolitical risk and structurally high public debt concerns.

Macro: soft but slower landing holds - for now. Macro data through the December quarter largely validated a “slower but softer” landing narrative. Growth in the US cooled but remained positive, supported by decent household consumption, resilient capital expenditure, and an easing, but not collapsing, labour market. The Federal Reserve cut rates by another 0.25% in December, taking the policy rate to the mid 3% range, while signalling that any further easing in 2026 would be gradual and data dependent.

In Europe, activity remained subdued but not recessionary, with the ECB keeping policy rates on hold for a fourth consecutive meeting as it balanced weak growth against still above target inflation. The UK finally joined the easing camp with a 0.25% cut, acknowledging rising labour market slack and fragile domestic demand even as fiscal constraints continued to bite.

The global inflation picture improved further, with headline measures drifting closer to central bank targets and core pressures moderating, particularly in goods. However, services inflation and wage dynamics remained sticky enough to keep real policy rates restrictive in most advanced economies, limiting the scope for rapid, aggressive easing in early 2026.

Australia’s macro environment remained characterised by low aggregate growth, effectively flat per capita output, and softening labour demand, even as inflation trended lower (though stubbornly so) versus earlier 2025 peaks. The RBA stayed cautious, keeping policy restrictive while emphasising the need to see more decisive evidence that services inflation and expectations were contained before contemplating meaningful cuts.

Politics, policy, and portfolio implications. Geopolitics and domestic politics continued to generate headlines but stopped short of derailing markets, reinforcing 2025’s pattern of persistent noise but limited transmission to macro outcomes. Key flashpoints - renewed Middle East tensions, ongoing conflict in Eastern Europe, periodic trade and technology frictions between major powers - contributed to episodic spikes in volatility and supported demand for real asset hedges but did not fundamentally alter the growth or earnings trajectory.

Policy remained the dominant medium term risk factor. In the US, the Trump administration maintained a transactional, domestically oriented approach to trade and industrial policy, with tariff and regulatory settings in strategic sectors continuing to influence supply chain configuration, capital spending, and relative performance across regions. In Europe and Japan, debates around fiscal rules, defence burdens and industrial policy reflected the tension between near term support and long term debt sustainability, reinforcing the likelihood of periodic fiscal scares and bouts of rate market volatility.

Summary & Outlook. For multi asset investors, the December quarter underscored several portfolio themes. First, after a year of strong equity and credit performance, valuation discipline is again central: future returns will depend increasingly on earnings, and be particularly sensitive to earnings revisions, rather than just on liquidity. Second, diversification has been partially restored, with bonds once more offering some ballast, but correlations remain unstable enough that reliance on any single hedge is risky.

Finally, the big structural themes in place earlier in 2025 - high government debt, ageing populations, migration, the energy transition and strategic competition over technology and supply chains - remain key long term drivers of risk and return. Against that backdrop, maintaining diversification, emphasising quality and balance sheet resilience, and avoiding the temptation to chase late cycle momentum-fuelled rallies remain central to navigating 2026 as interest rate cuts continue but real world growth and profits normalise only gradually.

The Investment & Research team at PSK are always monitoring market conditions and data points to ensure portfolios align with our overall long-term objectives. If you’d like to discuss any of the points raised, please contact your Adviser or call us on (02) 8365 8300.