Positioning for a Broader Cycle

The structural picture remains constructive. The easing of Middle East tensions (albeit with the occasional skirmish) has removed a key source of inflation pressure, improved the entry point across a range of assets, and reinforced our view that the conditions for a broadening of equity returns are in place. Our asset allocation positions reflect that view, while remaining attentive to the risks that could disrupt it.

We carry an overweight to fixed rate Australian bonds and investment grade credit. With the RBA cash rate appearing to be at or near its peak, the asymmetry of outcomes has shifted in favour of duration. A softening labour market, with unemployment edging higher in recent months*, adds to a picture of gradually easing domestic demand. Combined with moderating inflation, softening household consumption, lower oil prices, and incremental weakness in property prices, the conditions are building for the RBA to begin easing. In that environment, locking in current yields across investment grade credit offers an attractive risk-adjusted proposition.

In equities, we hold an overweight to global equities with a slight preference for emerging markets. The AI-driven investment cycle is broadening into industrials, materials, and a recovering global manufacturing base, and critically, recent gains have been supported by genuine earnings upgrades rather than valuation expansion. We see further scope for this broadening to extend equity returns beyond large-cap technology, benefiting small-cap equities and emerging markets in particular. That said, we are mindful of two risks flagged in our market outlook: the possibility of further Fed tightening under its new chair, which we monitor closely given its implications for rate-sensitive assets; and elevated index concentration, which we manage through selective exposure rather than passive replication.

Our stance on Australian equities is neutral, with a preference for global over domestic exposure. Recent valuation retracement has reduced the most acute overvaluation, and Australia’s domestic investment pipeline, driven by data centres and infrastructure projects, provides some earnings support. However, the major banks represent a significant concentration in the ASX 200 and face a material downside skew if the residential property market were to deteriorate in a sustained way. A loosening labour market also introduces some caution around the consumer-facing parts of the index, though we would note that much of this is arguably already in the price. On balance, we see select opportunities within the Australian equity market but ultimately think the global opportunity set is more compelling.

On alternatives, we are broadly neutral at the headline level but hold strong sub-asset class views. Infrastructure stands out as our preferred exposure within the sleeve. Structural tailwinds including the energy transition, digital connectivity, and demographic-driven demand for essential services are enabling asset base expansion for well-positioned operators. Infrastructure also provides meaningful inflation linkage through regulated or contracted revenue streams, an attribute that retains portfolio value even as inflation moderates from its peak.

Taken together, the current environment presents a genuinely broad opportunity set across fixed income, equities, and real assets. The macroeconomic risks we have identified, including the path of central bank policy, housing market dynamics, and residual geopolitical uncertainty, are real but manageable within a well-constructed portfolio. Our positioning is designed to capture the opportunities this cycle is presenting while maintaining the diversification necessary to navigate those risks with confidence.