Financial Year 2025/26 Review: A Year of Resilience and Surprises

As we approach the end of the financial year, investors have once again been reminded that markets rarely move in a straight line. Despite ongoing geopolitical tensions, persistent inflation concerns and changing interest rate expectations, most growth assets delivered positive returns over the period.

The key lesson from FY2025/26 was that remaining invested and diversified continued to reward patient investors.

Market Performance Snapshot (FY2025/26)

What Was Consistent?

1) Quality Companies Continued to Lead

Investors once again favoured businesses with strong balance sheets, reliable earnings and pricing power. Large-cap technology businesses, healthcare leaders and global consumer franchises remained dominant contributors to portfolio returns.

While market leadership broadened somewhat throughout the year, investors continued to reward companies capable of growing earnings despite economic uncertainty.

2) Artificial Intelligence Remained a Major Investment Theme

The AI investment cycle remained one of the most significant structural themes influencing global markets. Demand for data centres, semiconductor infrastructure, cloud computing and digital productivity solutions continued to drive capital investment globally.

Importantly, the market focus shifted from speculative AI opportunities toward companies demonstrating genuine commercial benefits and earnings growth.

3) Diversification Continued to Work

While equity markets generated the strongest returns, diversified portfolios benefited from contributions across multiple asset classes. Cash and fixed income provided stability during periods of volatility, while alternative assets and gold helped offset geopolitical uncertainty.

Investors who maintained diversified portfolios were generally rewarded with smoother outcomes than those attempting to predict short-term market movements.

4) Inflation Remained Central to Market Thinking

Throughout the year, inflation and central bank policy remained the dominant macroeconomic drivers. Every major inflation release, employment report and central bank announcement influenced market sentiment as investors reassessed the outlook for interest rates. The Reserve Bank of Australia spent much of the year balancing resilient economic activity against inflation that remained above target.

What Was Unexpected?

1) Interest Rate Expectations Reversed

At the beginning of the financial year, markets broadly expected a continuation of the global rate-cutting cycle.

Instead, stronger-than-expected inflation data and resilient economic activity forced investors to reassess that outlook. In Australia, expectations shifted from further easing toward the possibility of additional tightening, creating significant volatility across bond and equity markets.

2) Bond Market Volatility Returned

Many investors expected bonds to provide a smoother path as inflation moderated. However, changing interest rate expectations pushed government bond yields higher during parts of the year, leading to periods of negative bond returns and reminding investors that fixed income remains sensitive to inflation and policy surprises.

3) Gold Significantly Outperformed Expectations

Gold emerged as one of the standout performers of the year. Ongoing geopolitical uncertainty, concerns around fiscal deficits and continued central bank demand helped drive strong gains. Few market participants anticipated the extent of gold's outperformance twelve months ago.

4) Economic Growth Proved More Resilient Than Forecast

Despite higher borrowing costs, consumers, labour markets and corporate earnings generally held up better than many economists predicted. Recession forecasts that were widely discussed at the start of the period largely failed to materialise, both in Australia and globally. Global growth remained more resilient than expected despite ongoing trade and geopolitical challenges.

How did Diversified Portfolios Perform?

The difference between the strongest and weakest diversified peer groups was driven primarily by asset allocation rather than manager selection. Equity markets, particularly global shares, were the largest contributors to returns, while cash and fixed income provided stability and income.

For long-term investors, the results reinforce the value of maintaining an investment strategy aligned with personal objectives and risk tolerance rather than attempting to react to short-term market movements.

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