It is important to distinguish between the cyclical and the structural. Markets will remain more volatile than usual while uncertainty around the conflict in the Middle East persists, but the structural outlook is constructive.
The US reporting season has been exceptionally strong, the AI capex boom continues, and the consumer remains resilient. Reflecting this, US equities have outperformed and pushed to record highs.
Domestically, the picture is more complicated. A cyclical slowdown is underway as inflation is too high and the RBA has tightened policy quickly, placing pressure on consumers. Australian equities have consequently underperformed.
Even so, Australia’s structural outlook remains positive, underpinned by balance sheet strength and a globally significant resource endowment.
There are investment opportunities in this environment and pragmatic portfolio optimisation is warranted. But radical changes are rarely rewarded over the long run. We continue to expect near-term underperformance in Australian equities, while opportunities to add domestic duration should emerge over time.
