Share markets have been facing several headwinds to start 2026 including pessimistic AI scenarios, war in Iran and the subsequent oil price rally, elevated market valuations and strong prior year gains. This has resulted in share market losses over the quarter, with the ASX 200 -1.6% and global equities declining 8% (in AUD terms). Markets are past their “peak fear” moment in late March, with the US announcing a ceasefire in Iran in early April. It remains to be seen how the Strait of Hormuz pinch point conflict resolves, but we are hopeful that order is restored, vessel movements resume and oil and gas prices revert to lower levels. This is key for share market investors, as it will determine the period of elevated oil and gas prices, near term inflation and consumer sentiment impact, and economic growth headwinds.

Our outlook for the next 12 months is that opportunities will be more diverse compared to recent years whereby a “rising tide lifted all boats”. The risks facing investors include geopolitical tensions, elevated share market valuations, fiscal deficits/ debts, increased unemployment and interest rates risks from structural factors (AI) and cyclical factors (above trend inflation, particularly in Australia). On AI: the hundreds of billions of dollars being invested in AI will result in a productivity explosion and re-shape the job market globally. The results will be widespread white-collar job displacement and increased corporate profitability. The biggest beneficiaries will be companies with large pools of white-collar workers (such as Financials and Technology) that can augment their human capital with AI tools, driving increased profitability. There are several factors that will limit the impact of AI adoption on employment and corporate earnings growth, including new AI job creation, labour transition, rising energy costs and increased regulation.

Share market valuations have cooled in the last few months but remain in the top 20% compared to history and weigh on our expectations for share market returns over the next few years when compared to the same time last year. Offsetting the valuation risk is corporate earnings growth, which is expected to be very strong over the next 12 months, both offshore (US +15%) and domestically (Australian +10%). Within equities we have a bias to international markets given the broad opportunity set. At a style and sector level we prefer a balanced approach between Growth (Technology and Communications), Defensives (Healthcare and Infrastructure) and Cyclicals (offshore Financials).

Defensive fixed income assets remain attractive, with high cash yields and low corporate defaults contributing to a high single digit return expectations. This is particularly attractive for income-oriented portfolios but also has a role to play to dampen volatility in growth-oriented portfolios.

Asset Class Perspectives

Australian Equities

Beneficiary of inflationary environment via exposure to Financials and Resources. Remains a source of defensive dividend income streams from industries such as Consumer Staples and Infrastructure. The Australian share market looks fully valued and offers limited earnings growth compared to offshore markets.

International Equities

Exposure to high quality companies, with leading market positions and pricing power that are leveraged to structural growth trends. Key sector exposures include Infrastructure, Healthcare, Technology, and Communications. International Equities remain at multi-year expensive valuations, but we think this can be maintained in an environment where earnings growth remains very strong.

Currency (AUDUSD)

We have a slight preference for currency hedging, as the AUDUSD is trading near its fair value but the interest rate differentials look like favouring a weaker USD (i.e. lower US rates, flat offshore rates).

Fixed Income

Higher base cash rates make fixed income the most attractive relative to equities in 15 years. We prefer a mix of government bonds, investment grade corporate bonds and loans, property backed securities and private credit.

Cash

We have recently lowered our cash levels to take advantage of more attractive fixed income yields.

Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. Janaury 2026

Contact: Financial Decisions PO Box 484 Mona Vale NSW 1660, T 02 9997 4647