As we reflect on 2025, it’s clear the year brought its share of surprises and challenges. Despite a backdrop of political uncertainty and slowing growth, markets once again showed resilience. Equities finished higher, bonds navigated a difficult path, and policy debates were dominated by President Trump’s tariff agenda and ongoing China tensions. Inflation continued to ease globally but remained sticky in key economies, including the US and Australia, limiting the pace of central bank easing even as growth decelerated and political risk rose.
Global equities posted strong gains in 2025, with developed market indices ending the year comfortably positive after navigating repeated bouts of volatility around trade headlines, earnings downgrades, and central bank meetings. The year began with optimism that accumulated disinflation would allow central banks, including the RBA, to deliver a more meaningful easing cycle. This supported valuations already elevated after several years of AI and tech led gains, until Q2 jitters around tariffs and weak global trade raised fears of margin pressure, slower growth and, locally, a more abrupt slowdown in an already sluggish Australian economy.
As Trump’s tariff program rolled out, equity markets faced a series of mini shocks that repeatedly repriced global trade exposed sectors. Australian equities were not immune, given the market’s high exposure to resources, China linked demand and global cyclicals. Periods of risk aversion weighed on the Australian dollar, amplifying offshore volatility for unhedged investors even as local corporate fundamentals changed little. US markets, still dominated by mega cap tech, underperformed the strongest periods of previous years as investors rotated toward Europe and select Asian markets, seen as relative winners from shifting supply chains, growing concern about US debt and foreign policy, and a softer US dollar late in the year. European banks and defence stocks led gains, while emerging markets posted exceptionally strong gains led by AI themed stocks in China, South Korea and Taiwan. This rewarded Australian investors who maintained meaningful offshore diversification and, in many cases, unhedged exposures as the Australian dollar remained under pressure.
Style and sector dispersion remained elevated. Cyclicals and value had brief windows of outperformance, particularly in early and late 2025 when investors bet on a soft landing plus reshoring upside. Those trades proved fragile whenever global PMIs weakened or tariff lists broadened. Defensive sectors such as staples and healthcare regained some strategic relevance as investors sought ballast against political risk and questioned the durability of ultra elevated tech multiples. This pattern was mirrored locally, with Australian healthcare and quality infrastructure regaining favour. Within technology and communication services, markets increasingly distinguished between genuine cash flow compounders and more speculative “concept” names, both offshore and within the smaller, more volatile Australian technology universe.
Bonds spent much of 2025 caught between fiscal risk, higher term premia and slower growth with disinflation. Early hopes for aggressive easing drove a rally in duration and renewed enthusiasm for longer dated government paper, including Australian Commonwealth bonds. That optimism faded as structural US fiscal deficits and rising issuance needs pushed term premiums higher and periodically steepened yield curves. This limited total returns and reminded investors that “bonds as ballast” was no longer guaranteed. Australian yields followed global dynamics despite the country’s still benign public debt metrics. Credit markets proved more resilient than feared. Investment grade spreads stayed contained, while high yield saw greater differentiation. In Australia, bank and high quality corporate credit remained relatively stable, even as stress emerged in more leveraged property and consumer facing names.
Another strong year for asset prices, with returns as follows (at time of writing):
| Australian Cash – 3.65% | Australian Listed Policy – 7.15% | Australian Equities – 8.91% |
| Australian Bonds – 3.83% | Global Listed Property (Unhedged) – 3.59% / (Hedged) – 10.15% | Global Equities – 14.31% |
| Australian Credit – 4.59% | Global Listed Infrastructure (Unhedged) – 10.67% / (Hedged) – 14.60% | Emerging Market Equities – 22.44% |
| Global Bonds – 4.66% | Australian Direct Property – 6.08% | US Tech (NASDAQ) – 14.91% |
Source: Morningstar
The global economy slowed but did not break. Growth stepped down to around 3% and remained highly uneven across regions. Advanced economies cooled as earlier policy tightening, fading post pandemic savings and weaker global trade softened consumption and investment. Parts of Asia and emerging markets benefited from targeted fiscal support and supply chain reconfiguration. Australia stayed in the slow growth camp. Population growth and public spending masked very weak per capita outcomes, while higher mortgage rates and rents weighed heavily on household disposable income and confidence.
Inflation moved lower at the headline level but remained above target in many economies, particularly in the US and Australia where sticky services and housing components complicated central banks’ efforts to declare victory. In Australia, goods disinflation was increasingly offset by stubborn services prices and housing pressures, leaving the RBA uneasy about inflation returning to its 2-3% target band. Central banks shifted from aggressive tightening to cautious easing, but the scope of rate cuts fell short of early year hopes. Investors moved from expecting rapid normalisation to recognising that policy rates might stay restrictive amid fiscal strain, demographic headwinds and structurally weaker trade. For Australia, this meant repeated oscillation between expectations of imminent RBA cuts and fears that sticky services CPI would keep rates on hold, prolonging pressure on leveraged households and interest sensitive sectors.
The US spent 2025 in a “slow grind” phase. Growth decelerated but avoided outright recession. Consumption became more fragile, and capital expenditure concentrated in AI, reshoring and energy/security rather than broad based expansion. Core inflation remained sticky and forced the Fed into a cautious, limited easing cycle. The euro area remained near stall speed with manufacturing under persistent pressure, services only partly offsetting, while the ECB delivered modest easing but was constrained by fiscal and fragmentation concerns. Emerging markets split into reform oriented and commodity exporting winners versus more fragile, externally reliant economies. For Australia, this mattered through commodity channels. Demand from stronger emerging markets, especially in Asia, helped offset industrial activity in weaker developed markets, even as the China led ‘one way bet’ era continued to fade.
Politics remained a key macro driver, with President Trump’s second term setting much of the risk tone through an aggressive and often improvisational trade strategy. Broad tariffs on import, especially from China, but also Mexico and Canada, rekindled uncertainty about global supply chains and the inflationary implications of “America First” trade policy. Australian exporters felt indirect pressure through weaker trade volumes, more volatile Chinese growth and sentiment, and a higher global risk premium. The US-China relationship oscillated between confrontation and fragile truce. Washington layered on tariffs and export controls, while Beijing responded with targeted measures on critical minerals, energy and select US linked corporates. These moves underlined China’s leverage over key inputs and reminded Australia of the strategic sensitivity of its own resource exports. Beyond that bilateral contest, ongoing tensions in Eastern Europe, the Middle East and parts of the Indo Pacific kept demand for safe havens and hard assets elevated. Politics, rather than traditional business cycle mechanics, would remain central to macro and market outcomes, with Australia navigating these currents as a small, open, resource rich economy.
The interplay between elevated fiscal deficits, re weaponised trade policy and still abnormal inflation suggests the post GFC era of low rates, benign politics and easy diversification is unlikely to return soon. Markets are transitioning from a world dominated by central banks to one where fiscal authorities and geopolitical actors often take the driver’s seat. This has important implications for correlations, risk premia and portfolio construction. For Australia, shocks will continue to transmit quickly through trade, confidence and capital flows. Local choices on productivity, tax and migration will increasingly determine how those shocks are absorbed.
Key issues into 2026 include the depth and duration of global and Australian growth deceleration; the evolution of the tariff regime and its spill overs into commodity demand and terms of trade will be critical. Fiscal realism versus fiscal fatigue in the US, Europe and Australia also matters, along with geopolitical red lines across the Indo Pacific and other key regions. This environment calls for diversified exposure across regions, sectors and styles, and requires a nuanced approach to duration and credit quality. For Australian investors explicit decisions about domestic versus offshore risk and currency will be essential.
The coming period is unlikely to resemble any historical steady state. Instead, it looks like a continuing experiment in managing high debt, politicised trade and contested geopolitics. These conditions will likely continue to reward flexibility, active risk management, and a willingness to challenge comforting narratives.
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.
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it's appropriate to you, in light of your objectives, financial situation or needs.
