MONTHLY ECONOMIC & INVESTMENT REVIEW – DECEMBER 2025:
Global markets closed out 2025 on a cautious note amid quieter holiday trading and rotation out of high‑beta sectors. Major equity benchmarks experienced modest declines late in the month, yet remain significantly higher on the year. Safe‑haven assets, especially precious metals, posted exceptional gains as expectations for U.S. rate cuts and geopolitical uncertainty underpinned demand. Fixed income exhibited stable to slightly lower yields as markets anticipate further easing from central banks in 2026. Commodities were mixed with strong performance in metals and softer energy prices. Currency markets were influenced by a weaker U.S. dollar and local dynamics around interest rate outlooks. Overall, investor sentiment entering 2026 is cautiously constructive but balanced against concerns around growth, valuations, and policy uncertainty.
2. Asset Class Monthly Performance
- Australia (S&P/ASX 200) – Modest gains followed by slight pullbacks; index hovered near ~8,763 by pre holiday trading after mixed directional moves for much of December. Early December saw sideways to slightly higher price action, but the market ended recent sessions softer amid profit taking. Through the month, the ASX 200 recorded positive breadth but price action remained relatively flat, reflecting late year sector rotation.
- Global Developed Equities — S&P 500: Declined modestly late in December; ended the year up ~17% overall. Nasdaq Composite: Also weak into year end, though posted strong 2025 gains. FTSE 100: Benefited from strong relative performance in 2025, posting one of its best years since 2009.
- Emerging Markets — EM performance was mixed, as the U.S. dollar’s weakening trend supported flows yet China specific weakness persisted amid policy uncertainty.
- Listed Real Assets — A‑REITs delivered modest positive returns in December 2025, reversing some year‑end weakness as selective yield‑oriented sectors found support amid expectations for global rate cuts. Industrial and logistics‑exposed trusts led the way, while traditional office and retail names lagged due to ongoing structural headwinds. Global REITs also finished December in positive territory, supported by valuations and lower broad bond yields that boosted investor demand for income‑generating assets. According to the MSCI World REITs Index, global REIT equities posted an approximate +0.9% price return for the month, reflecting strength in non‑U.S. property markets and sectors such as healthcare and logistics.
Global Infrastructure exhibited stable to slightly mixed performance in December, with the FTSE Global Core Infrastructure Index showing an approximate –0.4% price move over the month. While some infrastructure segments (such as utilities and transport) attracted defensive inflows late in the year, overall index price performance was modestly softer amid sector rotation and bond market repricing.
- Precious Metals — Gold (+3.8%) and silver (+23%) surged reflecting strong investor demand and safe haven buying, reaching record or near record levels for 2025. Energy & Others: Oil prices saw mixed performance with some uptick late in the month. Industrial Metals: Copper and related metals experienced strength due to investor re-engaging the electrification theme.
- Fixed Income — Australian and global bond markets posted modest gains in December 2025, supported by rate-cut expectations and lower volatility. Australian bonds, as measured by the Bloomberg AusBond Composite Index, delivered positive returns. The 10‑year yield eased to ~4.75%, down slightly from earlier highs, while shorter maturities held steady as markets anticipated RBA action. Global bonds, tracked by the Bloomberg Global Aggregate Index (AUD‑hedged), also ended the month in positive territory, benefiting from falling yields and stronger reinvestment income. Easing inflation and policy outlooks in the U.S. and Europe supported sentiment and pricing. Credit — Investment-grade credit outperformed, with tight spreads and steady demand lifting returns. High-yield credit saw modest underperformance as spreads widened slightly in risk-sensitive sectors.
- Currencies — AUD: Fluctuated around 14 month highs against the USD before holiday disruptions. USD: Weaker trend as markets anticipated rate cuts and global monetary easing. JPY & EUR: The yen gained slightly amidst BoJ policy shifts, while the euro benefited from regional fundamentals.
- Global Macroeconomic and Corporate Earnings Overview
As 2025 ended, the global macroeconomic environment remained cautiously constructive. Economic momentum softened across major regions, but signs of deterioration were limited. December was marked by easing inflation, early labour market cooling in the U.S., and growing expectations for measured rate cuts in 2026.
In the United States, inflation moderated further, with headline CPI holding below 3%, while unemployment rose to 4.6%, signalling labour market softening. The Federal Reserve responded with a third 25 bps rate cut, bringing its target range to 3.50%–3.75%. Fed guidance remained cautious. U.S. equities held up, supported by robust Q4 earnings—led by large-cap tech, industrials, and healthcare.
Europe continued to stabilise. Inflation declined, labour markets held firm, and services activity improved. Fiscal policy remained measured, avoiding recession-inducing tightening. This supported risk assets and revived interest in European equities and credit.
In Japan, supportive policy, yen weakness, and resilient semiconductor demand sustained momentum. Earnings strength in global exporters and capital goods sectors remained evident. While the Bank of Japan hinted at future policy shifts, the near-term environment still supports reflation and business investment.
China underperformed. Ongoing structural issues in property and consumer confidence weighed on recovery, despite selective stimulus. Growth remained uneven, and earnings visibility was limited. Tactical opportunities exist in export infrastructure and energy, but broader confidence is lacking.
Emerging Markets delivered mixed results. Countries with fiscal strength and current account surpluses benefitted from a softer U.S. dollar and firming commodity prices. Corporate earnings were stronger in Latin America and Southeast Asia, while other markets remained under pressure.
Australia remained in a delicate position. Inflation is easing within the RBA’s target, yet non-discretionary price pressures—housing and utilities—remain elevated. Labour markets softened, and households felt the impact of high mortgage costs and weak sentiment. However, real wages are recovering, population growth is strong, and commodities continue to support the economy. Corporate earnings held up in globally exposed and defensive sectors, while domestic consumer-linked names lagged.
Looking ahead, the global earnings cycle appears to be transitioning. U.S. mega-cap tech may not sustain 2025’s dominance, especially as valuations look stretched. Broader earnings growth in Europe, Japan, and selective emerging markets supports a shift in regional exposure. AI and infrastructure-led capex cycles may broaden earnings leadership into 2026 but we remain vigilant.
4. Central Bank Interest Rate Policy
Monetary policy divergence remains a key driver of global asset allocation. In December, the U.S. Federal Reserve delivered its third 25 bps rate cut of the year, taking the fed funds range to 3.50%–3.75%, citing cooling inflation and softening labour market conditions. Markets now anticipate a gradual easing cycle through 2026, though Fed messaging remains data-dependent.
The European Central Bank and Bank of England held rates steady, signalling patience amid improving inflation dynamics. Meanwhile, the Bank of Japan made a historic shift, raising rates slightly—the first tightening move in years—as inflation expectations became more anchored.
Closer to home, the RBA maintained its policy rate at 3.60% for a sixth consecutive meeting, balancing moderating inflation with lingering cost pressures in essentials. Investors should expect regional variations in policy timing to shape currency, bond, and equity risk premiums well into 2026.
5. Outlook
As we transition into 2026, global macro conditions remain balanced but fragile. Disinflation is progressing across most major economies, labour markets are softening, and central banks are cautiously pivoting toward policy easing. While recession risk has receded, growth momentum remains uneven, and market returns are likely to normalise after a strong 2025. Investors should prepare for greater dispersion in regional and sector performance, with earnings leadership potentially shifting away from U.S. mega-cap technology toward more broadly diversified areas like Europe, Japan, and selected emerging markets.
For Australian investors, the domestic outlook is shaped by both global developments and unique local dynamics. Inflation has returned to the RBA’s target band, but price pressures in housing, energy, and insurance remain elevated. Labour markets are easing, though still relatively tight, and household spending is under pressure from high mortgage servicing costs and soft consumer sentiment. On the positive side, population growth, resilient terms of trade, and robust infrastructure spending provide partial offsets to broader economic deceleration.
Earnings growth for 2026 is expected to be subdued across key sectors—especially in banks and miners—while valuation multiples in non-resource sectors remain elevated. As such, we maintain a cautiously neutral stance on Australian equities and continue to favour global diversification, quality income assets, and real asset exposures in client portfolios.
Overall, we remain cautiously constructive on risk assets but expect returns to moderate as valuations are stretched and policy uncertainty persists.
6. Portfolio Strategy & Asset Allocation
