Economic Update - January 2026

As we step into January 2026, markets have done what they often do at year-end: pause, rebalance, and start pricing the “next chapter.” As 2025 drew to a close, markets delivered a reassuring message: despite volatility, diversification worked. December itself was mixed, but importantly, every major asset class delivered positive returns over the year for the first time since the COVID period — a solid foundation as investors turn their attention to what comes next.

December market snapshot: calm, but selective

Global markets ended the year on relatively steady footing. US equities were broadly flat, with the S\&P 500 edging down slightly, while international markets were stronger, particularly in Europe. Emerging markets also outperformed developed markets.

In Australia, the S&P/ASX 200 Accumulation Index rose 1.3% in December, while small caps gained 1.4%, continuing their strong relative performance over the past year. However, leadership was narrow — only three of the 11 ASX sectors finished the month higher. Meanwhile, fixed income struggled, with bond prices falling as long‑term yields rose across Australia, the US, and Japan, despite the US Federal Reserve cutting interest rates during the month.

Australian equities: resources do the heavy lifting

The local market’s December gain was driven primarily by Materials (+6.7%), supported by a strong month for commodities. Copper surged, gold continued its powerful run, and iron ore prices lifted modestly. These moves helped mining and resource stocks rebound strongly into year‑end. Financials (+3.4%) were the other key contributor, benefiting from a stable domestic outlook and the Reserve Bank of Australia’s decision to hold the cash rate at 3.6%. The RBA acknowledged inflation risks had tilted higher, but emphasised that more time is needed to assess how persistent those pressures may be. Property (+2.0%) also delivered positive returns locally, supported by selective value and the view that interest rates may eventually move lower, even if cuts remain some way off.

Sector laggards: rates bite growth areas

On the downside, Information Technology (-8.7%) and Health Care (-7.1%) led declines.

• Technology stocks were pressured by rising long‑term bond yields, which tend to weigh on high‑valuation, growth‑oriented companies. This was consistent with global trends, where value stocks outperformed growth during December.

• Health care weakness was partly driven by company‑specific issues, most notably a sharp fall in Telix Pharmaceuticals following mixed clinical trial results and ongoing regulatory uncertainty.

Other sectors, including energy and consumer‑exposed areas, generally struggled as oil prices declined and investors remained cautious heading into year‑end.

Global markets: a Fed cut — but higher yields

One of December’s key themes was an apparent contradiction: the US Federal Reserve cut interest rates by 0.25%, yet long‑term bond yields rose. This pushed bond prices lower and weighed on interest‑rate‑sensitive assets.

The message from markets is clear - investors are still balancing inflation risks, government borrowing, and economic resilience, rather than focusing solely on short‑term rate cuts. The Fed’s guidance suggests only a gradual easing path ahead, reinforcing uncertainty around the timing and scale of future cuts.

Emerging markets: a relative bright spot

Emerging market equities outperformed developed markets during December, helped by a rebound in Chinese shares. China showed tentative signs of stabilisation, with manufacturing activity returning to expansion territory, although consumer spending remained soft.

From a valuation perspective, emerging markets continue to look attractive relative to developed markets, particularly if policy support in China gains traction over 2026.

Fixed income: a challenging finish

Bond markets had a tough end to the year. Australian 10‑year bond yields rose to around 4.7%, while US yields also moved higher. Japan stood out, with the Bank of Japan raising rates again — a reminder that not all central banks are easing at the same pace.

Despite recent weakness, Australian bonds remain relatively attractive compared to global peers due to higher yields and stronger fiscal discipline.

The standout theme: gold’s growing role

One of the most important longer‑term themes highlighted in December was gold. The metal has delivered extraordinary returns in recent years, supported by:

• Heavy central bank buying, particularly from emerging markets

• Rising geopolitical risk

• Concerns about inflation, government debt, and the long‑term role of the US dollar

While gold is volatile and prone to sharp pullbacks after strong rallies, it is increasingly viewed as a strategic portfolio diversifier, rather than just a short‑term trade.

What markets are focused on going forward

 As we move further into 2026, investors are likely to keep a close eye on:

1. Inflation trends — particularly whether recent pressures prove persistent

2. The pace of rate cuts (and potential rate rises) — with central banks signalling caution

3. Economic resilience — growth is slowing, but remains broadly stable

4. China’s recovery — early signs of improvement, but still uneven

5. Geopolitical risk and diversification — supporting demand for assets like gold

Bottom line for investors

December reinforced an important lesson: markets are no longer driven by a single narrative. Leadership is rotating, diversification matters, and selectivity is key. As 2026 begins, investors are entering a year where balance, discipline, and patience are likely to be just as important as chasing returns.

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