Economic Update - December 2025

As 2025 draws to a close, financial markets are catching their breath after a year of strong gains and shifting dynamics. Global markets paused in November after a strong year, as uncertainty around U.S. economic data and the Federal Reserve’s interest rate path weighed on sentiment. Developed market equities were broadly flat, with the MSCI World Index up 0.2%, while U.S. equities edged higher (S\&P 500 +0.1%) despite a robust earnings season where over 80% of companies beat expectations. Emerging markets underperformed, falling 2.6%, led by weakness in China amid persistent manufacturing contraction and soft consumer demand. Commodities were mixed: gold surged 5.9%, continuing its stellar run, while oil fell 3.8% on oversupply concerns. Copper gained 3.3%, supported by infrastructure demand. Bond markets reflected uncertainty, with U.S. 10-year yields easing slightly to 4.02%, while Australian 10-year yields rose to 4.51% on strong inflation data.

Australian Market Snapshot

The S&P/ASX 200 fell 2.7% in November, with seven of eleven sectors closing lower. Key sector moves include:

• Information Technology (-11.6%). Negative drivers: Profit-taking after strong prior gains; global tech weakness | Positive drivers: Select software names held up on recurring revenue strength.

• Financials (-6.5%). Negative: Margin pressure and cautious outlooks from major banks. | Positive: Insurance names benefited from premium growth.

• Property (-3.9%). Negative: Higher bond yields weighed on valuations. | Positive: Niche segments like data centers showed resilience.

• Health Care (+2.0%). Positive: Defensive demand and strong earnings updates. | Negative: Currency headwinds for global operators.

• Consumer Staples (+1.6%). Positive: Solid retail sales and pricing power. | Negative: Input cost pressures remain.

• Materials (+1.6%). Positive: Lithium producers surged on rising prices (Pilbara Minerals +22.7%, Liontown +22.1%). | Negative: Iron ore demand concerns capped gains.

• Industrials (+0.2%). Positive: Infrastructure-linked names supported by government spending. | Negative: Freight and logistics faced margin compression.

Small caps also dipped (-1.5%) but remain up 19.4% Year on Year, outperforming large caps (+5.5% Year on Year).

Global Sector Highlights

• Developed Markets: Value stocks outperformed growth, reversing recent trends. Global real estate (+2.1%) and infrastructure (+3.2%) were standout performers, benefiting from defensive qualities and lower rate expectations.

• Emerging Markets: China’s weakness persisted, with manufacturing PMI at 49.2 for the eighth straight month of contraction. Policy support for consumption remains a key watchpoint.

Key Influences on Markets

• Interest Rate Outlook: Fed policy uncertainty remains central, with markets pricing in a potential cut in December.

• Inflation Trends: Australian CPI at 3.8% keeps RBA cautious; one rate cut projected in 2026.

• Geopolitical Risks: U.S. fiscal sustainability concerns, tariff uncertainty, and global fragmentation continue to shape sentiment.

• Commodity Dynamics: Gold’s meteoric rise (+170% since 2020) reflects structural drivers—central bank buying, ETF inflows, and geopolitical hedging.

Looking Ahead: What’s Next for Investors?

Markets are entering 2026 with a benign but fragile macro backdrop. Key themes to watch:

• Gold as a Strategic Allocation: Despite recent volatility, structural drivers—central bank diversification, geopolitical risk, and U.S. fiscal concerns—support a cautiously positive long-term view.

• Portfolio Positioning: Investment strategists favor Emerging Market Equities, Global Listed Property, and Infrastructure over Australian equities, citing valuation concerns and limited earnings upside.

• Defensive Tilt: Preference for Australian Bonds over global peers due to higher yields and fiscal discipline.

• Volatility Management: Expect elevated swings across risk assets; disciplined rebalancing remains critical.

Bottom Line

November marked a pause after a strong year, with sector rotation favoring defensives and real assets. While uncertainty around rates and growth persists, opportunities remain in select global sectors and alternative assets like gold. For retail investors, diversification and a focus on structural trends—rather than short-term noise—will be key to navigating the year ahead.

As always, if you have any questions or require a review of your investments, please don't hesitate to contact us.  Wishing you and your family a very Merry Christmas and we look forward to bringing you more updates in 2026.

Thanks to our research partners at Lonsec for assisting with the preparation of this Economic Update.