Christmas and Holiday Greetings to you all,
I have managed to spend a couple of weeks up in northern Finland and Norway, chasing the northern lights and gaining a better understanding of some of the social and political decisions made in Scandinavia, which is regarded as one of the happiest regions in the world according to surveys. All the Scandinavian countries are very wealthy, particularly due to Norwegian oil, and have used their good fortune to diversify into technology and provide excellent services for their citizens. One of the major takeaways for me was the confidence that the public has in their government to spend relatively high levels of tax wisely.
The Happiest Countries in the World for 2025
Source: World Happiness Report (2025)
As we approach Christmas, I think it is valuable to consider some of the key issues facing investors in the immediate future. Below are my thoughts on the major factors we should be mindful of:
2026-27 Key Risks – Global economic weakness, labour market softening, persistent inflation, productivity challenges, and fiscal and policy constraints.
Key Opportunities ahead – Strong business investment, consumer rebound potential, attractive income opportunities, structural reform upside, and diversification beyond resources.
- Markets at an Inflexion Point
There was very mixed data over the last four weeks in Australia, particularly with the concerning increase in inflation, which has effectively delayed any future interest rate reductions. At the heart of this is the increase in some goods and services, without a corresponding improvement in productivity to support these additional prices.
In aggregate, the economy is growing at around 2.2% at best, which is very similar to the level of net migration into Australia. This means the country is effectively just treading water economically on a per capita basis. In some parts of the economy, there are clear improvements in efficiency, including in the financial services sector. However, unnecessary red tape and double handling at multiple government levels are still stifling the economy from achieving its full potential.
Looking at our larger companies, many are now primarily being invested in for dividends rather than for any great expectation of growth. This is reflected in the short-term 12-month return of Australian shares relative to global counterparts. With an ageing population and a greater need for income for retirees in the drawdown phase of superannuation, these dividends are very valuable for supporting income streams – but less exciting in terms of true innovation and risk-taking to solve greater societal challenges. Much of the innovation is coming from smaller companies, and this is where the real potential currently lies.
Global Equity Trends
Source: Source: Bloomberg, LSEG, Betashares. Global Equities: MSCI All-Country World Index. Global Bonds: Bloomberg Global Aggregate Bond Index ($A hedged).
The RBA kept interest rates steady at 3.6% yesterday and indicated that there is unlikely to be much change for the immediate future unless there is a significant deterioration in the statistical data due over summer.
Private-sector investing has improved, but again, from a relatively low base. Meanwhile, the public sector has grown substantially in the last few years and has been quite a drag on overall productivity.
Stating the obvious: labour costs are very high, while technology remains incredibly scalable and cost-efficient when working properly. It is these technology companies that have the most potential for share prices to rise.
- An Over-Reliance on Property Prices
The Australian residential property market still underpins much of the nation’s wealth, with the principal place of residence still exempt from capital gains tax, regardless of its value. The practical effect of this is to favour investing in the family home – including taking out large mortgages with non-deductible interest – over taking business risks, where profits are taxable and there are significant risks in employing staff and dealing with multiple levels of government. In my view, this is leading to a more risk-averse culture, where people naturally reinvest in their principal place of residence as a fundamental step toward financial security.
- An Over-Reliance on Net Migration
While the vast majority of temporary residents return to their home countries within 10 years, Australia is very reliant on both short- and long-term net migration to support national growth. This has the effect of increasing property values, particularly where supply is limited.
Australian Long-Term Arrivals vs Departures
Source: Australian Bureau of Statistics
Having travelled extensively and being a migrant myself, I can assure you that Australia remains a highly desirable country to live in and continues to attract talented individuals from around the world. This natural advantage supports the growth of national assets, especially in the property market where supply is constrained.
- Who Benefits from the Productivity Growth of Artificial Intelligence?
Australians have always been quick adopters of new technology, and the use of AI is now second nature for many in our community, particularly those under 30. This allows rapid access to information – but the question becomes whether this can be converted into productive activity or is effectively wasted.
There is also a moral hazard if service providers do not implement adequate guardrails, allowing bad actors to misuse data. In Australia, the federal government has recently introduced legislation to limit social media access for under-sixteens to protect our community. Some European countries, notably the Netherlands and Switzerland, are now considering a four-day workweek, with the fifth day effectively paid by the state.
- An Over-Reliance on a Handful of Large US-Based Companies
We have spoken regularly about the overall size of the “Magnificent Seven” in the US, which have driven much of the aggregate share price growth in their markets. Companies like Nvidia and Microsoft are now substantially larger than Australia, and we are effectively reliant on them for technology and future growth opportunities.
There is significant business risk here. If there is an oversupply of data centres, or if AI reaches a natural peak with little future growth potential – like smartphones 15 years ago – there could be a substantial correction in their share prices.
- The Growth of Mainstream Private Equity and Private Credit in Portfolios
In the last five years, there has been a significant increase in allocations to both private equity and private credit, as public markets become more constrained, and companies choose to remain private.
The reality is that we then lack daily pricing of values and are heavily reliant on auditors and periodically updated information to value assets correctly. While this reduces short-term volatility, the opaqueness and lack of regulatory oversight pose significant business risks, as evidenced by several recent fraudulent investments in Australia.
Global: Private Equity & Private Debt
Source: EY Knowledge analysis: data from Pitchbook and Campden Wealth
- The Shadow of Retirement on Investment Decisions
With around 25% of the total superannuation pool now in the drawdown phase – approximately $1.2 trillion – the need for sustainable, reliable income, particularly with longevity risk managed, is becoming increasingly central for Australian retirees.
This investment pool is now drawing down an amount comparable to total Centrelink payments for retirees, which is positive for Australia, but presents significant investment risks for retirees, who bear the risk of share price declines impacting their portfolios. You should expect increasing regulatory oversight to ensure that income streams can be drawn down on a sustainable and reliable basis, given the tax benefits provided while building this capital.
A Time for Caution, but Not Paranoia
At any stage in the investment cycle, both positive and negative developments occur. As discussed, Australia’s collective assets have never been higher, underpinned by residential property. Yet productivity remains at levels seen 10 years ago – a poor outcome given the technological advantages now available.
A worst-case scenario would see inflation continue rising, productivity stagnate, and households drawing down on assets accumulated over the past 25 years, potentially leading to stagflation, with interest rates stubbornly high and inflation above the RBA’s 2–3% target band.
It is prudent to hold larger cash balances than usual and allow these dynamics to play out. If equity markets struggle, governments, through the Reserve Bank, generally intervene to encourage lower interest rates and stimulate markets. There is, therefore, a “put option” on long-term underperformance, meaning markets typically recover over 12-18 months – a pattern historically true for both shares and property.
Christmas Celebrations
We are holding our Christmas party this Friday in Manly and very much look forward to celebrating with you all. We never take for granted the fiduciary responsibility we have to our community to ensure that money is managed properly and that clients have access to professional advice as circumstances evolve.
We do not advertise publicly for new clients and greatly appreciate the referrals we currently receive from you, introducing your family and friends.
Sincerely
Tony and Fiona
Please note this newsletter is of a general nature only. Click to our website
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