The September quarter presented a complex market landscape marked by persistent inflation, rising interest rates, and ongoing geopolitical friction. While central banks, including the Reserve Bank of Australia, have tightened monetary policy further to keep inflation in check, global growth assets have shown surprising resilience, heavily supported by the strength of the US technology sector and the ongoing artificial intelligence boom. For investors seeking wealth creation, understanding these shifts is essential to long-term success.

In this quarterly market wrap, we examine the major global economic developments, break down domestic market conditions and interest rate pressures, and share our wealth management outlook to help you navigate the mixed economic signals ahead.

Global wrap

The major story of the September quarter was the material rise in interest rates (the yield curve), which seems to be in response to inflation remaining above target and the knock-on effects of the data centre boom. Most asset classes struggled over the quarter except for Global Equities, which remain supported by the strong growth of US companies.

Higher bond yields have led to minimal returns from bonds (as bond prices fall) while interest-rate-sensitive asset classes such as Property and Infrastructure have moved into negative territory. Equities are also at risk from higher bond yields, but the AI technology theme seems to be offsetting these concerns in the short term.

The reasons for higher interest rates are mostly negative (inflation above target, rising budget deficits and debt) but some see positives (higher yields reflect buoyant growth from the data centre boom, central banks are lifting cash rates to get inflation under control).

Much depends on how high interest rates go and for how long they remain elevated. A resolution to the Iran conflict and a recovery in oil and gas flows through the Strait of Hormuz would go a long way to easing inflation concerns and interest rates.

Clearly, geopolitical risks remain elevated under the Trump Presidency, and one wonders what the mid-term US elections in November will bring. If the Republicans lose power in Congress, what will be the implications for the US President? We can’t know for sure but suspect US policy could get even more volatile in the period ahead! The global outlook is certainly mixed; there is the overwhelming positive of the AI boom surrounded by geopolitical spot fires and the unsustainable trend in budget deficits and government debt. Working with a dedicated financial planner can help investors cut through this uncertainty and maintain strategic portfolio positioning.

Australian wrap

Economic growth remains moderate, while inflation continues to run above the RBA’s 2.0-3.0% target. The RBA has lost patience with inflation resulting in another lift in the cash rate to 4.60% – the fourth hike this year. Core inflation remains around 3.5% and has been driven by government spending, a surge in energy costs and poor productivity.

Returns on cash, term deposits and floating rate notes remain quite attractive and even bonds are looking enticing at current yields. However, Australian Property, Infrastructure and Equities have come under pressure from the higher yield curve. These dynamics are particularly relevant for those reviewing their self managed super fund or considering using super to buy investment property.

The Iran conflict has exposed Australia’s reliance on imported fuel and is likely to accelerate the energy transition to electricity powered by gas and renewables. The outlook for both the Energy and Resource sectors remains positive but the Property market is facing headwinds in terms of rising interest rates, rising construction costs and changes to tax policy. The slowing housing market is beginning to expose over-extended property developers such as Bathla property group in NSW. In turn, Banks and private credit lenders are facing the risk of lower valuations and higher loan impairments.

Bond yields are also on the rise in Australia, with the 10-year bond yield currently at 5.4%. Higher bond yields increase the cost of government debt and the discount rates used to value investments. It seems the bond market is sending a message that fiscal and monetary policy needs to be tightened.

Australia has a few challenges ahead, not the least is a lack of productivity which is limiting growth prospects and supporting inflation. A resolution to the Iran conflict and lower fuel prices would be a major positive towards bringing inflation back to target. Without that, the RBA could lift the cash rate one more time this cycle, but we suspect a run of soft economic data could keep the RBA on hold in the short term.

Outlook

Current conditions are certainly unusual. Inflation running above target and interest rates rising sharply would normally cause a correction in growth assets. This time around the AI theme and a buoyant US technology sector is keeping global equities at record levels.

Company earnings remain resilient but longer-term risks surrounding unsustainable budget deficits and debt seem to be building. In addition, US policy on trade and the Middle East have been adding to inflationary pressure. The bull case would be for the oil price to retreat and AI to deliver on the major productivity benefits that the market expects. The bear case would be the opposite. The truth is probably somewhere in between and accordingly we stick to our ‘muddle through’ outlook which implies tail risks will be avoided for now.

Speak with an LDB advisor

If you would like personalised business advisory or strategic guidance from a leading business advisory firm on how these market developments impact your investment, wealth, or tax strategy, please reach out to our team of expert accountants in Blackburn at LDB Group by calling (03) 9875 2900 or filling out our contact form.