Greetings, as we come towards the end of the Sydney winter and, indeed, the Australian earnings season for listed companies.
Australian Equities
The earnings season was quite solid and really reflected that our continuous disclosure regime is working well, with not too many shocks on the day. The health sector bounced back quite well after a very difficult previous year, and the resources sector was indeed the standout. The banking and financial services sector became focused on higher dividend payout ratios and, with the franking credits attached, this is approaching 100% of the profits of companies.
Given the new settings of the budget, I think you will see Australian investments now being primarily an income play, which is a much lower level of risk, while growth investments will be predominantly based in the US.
Of note was a very large Kangaroo bond issued by Alphabet (Google) in Australia that was substantially oversubscribed. It may well be now that most of the Magnificent 7 will do something similar in Australia. As a reminder, each of these companies is far larger than the entire Australian stock market. So, to some extent, we are now really beholden to movements in these seven companies for future economic growth.
Global Equities
The US market continues to hit new all-time highs, and at some stage you should expect a correction of 5% to 10%. The new information is very much the middle market now beginning to use AI more effectively to improve profitability and, hence, share prices. This is an encouraging sign and, if managed well, will mean that companies can be much more efficient, with the proviso that they will need to manage their staffing requirements carefully, including retraining where necessary.
Much of the investment is currently in these massive data centres, which are being used by the large AI providers for their large language applications. One of the largest providers, Anthropic, is looking to list in the next few weeks and is the provider of Claude, with OpenAI expected to list early next year.
At the heart of the matter now is whether technology is running faster than the human capacity to manage and utilise these resources. At the most extreme, we now have AI talking to AI in an ever-circular flow of communication without any human interaction.
My thinking is that it will take 12 to 24 months for this to settle down and then, rather like computer technology, reach a point of stability. There will need to be proper guardrails put in place by governments, and the reality is that Australia is a relatively small market which is often used for testing out new ideas and, as such, is subject to being pushed around by some of these global organisations.
Hyperscalers’ Capex Above $600 Bn in 2026
Source: Mufgamericas
Domestic Property
Clearly, there was much uncertainty in the market after the Federal Budget, which was only three months ago. What is immediately clear is that rent has gone up by far more than $2.00 a week, which is impacting 6,000,000 renters in Australia.
While Treasury is estimating that 7,500 Australians may be able to get into a first home, the damage done to the wider economy far outweighs any benefits. There is an expectation that many of the more extreme measures will be wound back and, as such, investors are naturally sitting on their hands until things become clearer.
Australian Rental Increases Over the Last 90 Days
Source: Cotality Home Value Index (March 2026)
CPI
In the meantime, the CPI data released earlier this week was slightly higher than expected which at best means that interest rates will stay the same until February or March, but with a possibility of an increase of 25 basis points.
It is important to break down CPI into discretionary and non-discretionary spending. Clearly, Australians have very little option but to pay their rent or mortgage repayments. However, eating out and travel are discretionary. As such, we need to look through these figures to see how much of this money is being spent by retirees drawing down on their allocated pensions for discretionary spending, which in itself becomes inflationary, as opposed to younger people renting properties who are consuming up to 70% of their income on rent and have precious little discretionary spending.
Australia is experiencing an uncomfortable combination of weak productivity and renewed inflation pressure
The RBA estimates non-farm labour productivity grew only 0.1% over the year to March 2026 and remains slightly below its pre-pandemic level. At the same time, headline inflation was 3.9% over the year to the June quarter and trimmed-mean inflation 3.6%, both still above the RBA’s 2–3% target band. That combination means businesses are producing little more per hour worked while labour and other input costs continue to rise.
Australia: Inflation has risen as productivity remain weak
Source: Reserve Bank of Australia
I would describe this as “stagflation-like” rather than full stagflation. Australia is not in recession, but the RBA expects GDP growth to slow to around 1.4% through 2026 while inflation remains elevated. Weak productivity reduces the economy’s ability to grow without creating price pressure: if wages rise by 3–4% but output per hour barely rises, unit labour costs increase and businesses eventually have to absorb lower margins or lift prices.
Australia’s problem is not unique, but our recent performance is poor by international standards. OECD data show Australian labour productivity fell 0.7% in 2024, compared with 1.2% growth across the OECD. Canada was roughly flat and the UK also fell 0.7%, while Denmark achieved 3.0%. The OECD notes that productivity growth has slowed broadly across advanced economies, but Australia has also suffered a particularly weak post-pandemic recovery.
Labour productivity growth, 2024: selected advanced economies
OECD Compendium of Productivity Indicators 2025
For investors, the significance is straightforward
Persistently weak productivity makes strong real wage growth, lower inflation and robust corporate profit growth harder to achieve simultaneously. It also increases the risk that Australian interest rates remain higher for longer. This reinforces the case for diversification: Australia continues to offer attractive income, dividends and franking credits, but global markets provide greater exposure to technology, innovation and companies capable of producing sustained productivity-led growth.
Model Portfolios
We have reviewed our model portfolios at the end of the financial year and made adjustments to reflect these budget changes. In essence, this means a higher level of dividends and franking credits in our Australian share portfolios, with lower amounts allocated to growth shares.
Conversely, we will hold a higher level of exposure in the international market, where we are seeking to benefit from technology and, ultimately, capital growth from investments.
We’ve been particularly careful with private credit in Australia, and you may have read in the newspapers that a number of the smaller funds are currently struggling to make their payments on time. While we have no exposure to these managers, it does remind us to be very careful about investment returns that appear too high to be relied upon in a declining market.
La Trobe Financial who are one of our providers have provided a brief summary for your comfort – click here.
Foreign Financial Scams
You may have read in the media that there has been a significant amount of fraud, of Australians losing their savings to foreign criminal gangs. If any of your family are dragged into this, please let us know immediately.
Scams at a glance
Source: Scamwatch
Our News
Again, thank you for the referrals that we are receiving. As you would expect, I am as busy as ever.
It is expected that two and a half million Australians will be retiring in the next few years, and the difference between advice and non-advice is stark, with the attached Russell report showing a 5.5% improvement in returns, including the psychology of investing, for advised clients.
We continue to build the business at a pace where we can still provide the correct personal service and welcome further referrals from your family and friends, particularly those located close to our office.
Sincerely,
Tony and Fiona
Please note this newsletter is of a general nature only.
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