Economic Snapshot – December 2025 Update

This article was prepared by Michael Furey, Principal of Delta Research & Advisory, on behalf of HPartners Group.

DECEMBER 2025 IN SUMMARY

• Strong and positive returns for all major assets were a feature in 2025, except Oil (which acts like a tax reduction so not necessarily bad). The best was Gold (>50% in AUD) followed by Emerging Markets and Small Australian Companies (both 25%).

• Whilst most Australian assets underperformed their global counterparts during 2025 and the final quarter, they were the strongest returning in December, whether equities, REITs, bonds, or the Aussie Dollar, which increased 2% against the US Dollar resulting in negative returns for unhedged global equity benchmarks.

• Australia’s Reserve Bank kept its cash rates at 3.6% on 9 December despite higher inflation than preferred. The latest headline inflation is 3.4% (down from 3.8%). Unemployment is steady at 4.3% and whilst just a couple of months ago, markets priced in rate reductions, at the time of writing the next move appears to be to 3.85% around the middle of 2026.

• Whilst USA has above-target inflation, continued tariffs, increasing geopolitical tensions, and a Federal Reserve Chair under legal threat, its cash rate is pricing a downward trajectory. Add the continued high USA Equity market valuations, and the USA situation is likely increased volatility across all markets. But the complexity and chaos associated with mixed economic data does not make any outcomes obvious or guaranteed in 2026.

• Our core investment message remains: maintain diversification, focus on the long term, and regularly rebalance. Major risks continue to lie with expensive sharemarkets (irrespective of artificial intelligence confidence and the prospect of illegal tariffs), including large companies of the USA, and we continue to favour quality (i.e. good profitability) and value (i.e. “cheap”) styles for long term investments in shares. Quality bonds are preferred as higher yielding below-investment grade bonds provide a historically low premium

   

A slight comeback for Australian assets

Source: Morningstar

WHAT HAPPENED LAST MONTH?

Markets & Economy

• Sharemarket volatility reduced during December and sharemarkets produced slightly positive returns around the world. That said, Australian Dollar strength (up 2% against US Dollar) turned a positive 0.6% Hedged Global Equity return into a negative 0.8% return.

• Australian sharemarkets ended the month of December up 1.3%, resulting in an underperforming 2025 return of 10.3% compared to MSCI World’s 2025 return of 12.9%.

• The big winner of 2025 was Gold, up over 50% in Australian dollars, but amongst sharemarkets, Emerging Markets had their best relative year in a long time and returned 25% for 2025 after a 1.3% in December. This is even though USA-imposed tariffs were expected to hit the Chinese economy hard and reduce manufacturing company profits – an example of the frequent mismatch between short term economic factors and sharemarket returns.

• Amongst local and global bond markets, yields generally increased in December meaning bond returns were negative. The higher yields are also likely contributing factors towards negative Global REITs and Global Infrastructure returns. In recent years, these global real assets have taken on investment behaviour similar to leveraged duration, meaning they were often strongly positive with declining bond yields and vice versa.

• The major economic issues during December included sticky inflation suggesting cash rates might stay higher than previously expected (& this despite a 25bps December cut by the US Federal Reserve); increasing geopolitical risks as tariff rhetoric and trade restrictions between major economies were re-introduced, continued conflicts in Middle East and Russia/Ukraine, and domestic political issues around the world impacting both business and investor sentiment surveys.

• Overall, local and global economic data and outlooks are mixed without obvious direction. It seems as if asking 10 economists for predictions there would be 20 different answers.

Outlook

• This update is written mid-January, and it appears geopolitical tensions are at their highest in many years. Whilst most geopolitical issues are typically shrugged off by markets, some current ones may not be including the legal action taken against the Federal Reserve Chair, Jerome Powell. Any loss of independence of this role will likely result in significant volatility across all markets – loss of central bank independence has happened in numerous countries around the world, and it never had a positive outcome.

• USA sharemarket valuations, particularly amongst growth-style securities, continue near record highs for this century. Other markets, including Australia and now Emerging Markets appear fully valued, although Europe and Japan may provide more appealing potential, despite their lower growth prospects. Anything but USA continues as our preferred overweights in the context of Global Shares although Global Small companies appear to be reasonable value too (including US).

• Inflation in Australia is currently over 3% and current pricing suggests the Reserve Bank of Australia’s next move will be a 25bps increase although other weakness suggests any rise won’t occur until the middle of 2026. Mixed economic outcomes create uncertainty around the direction of cash rates in USA and Australia, but there appears little catalyst to change existing fixed interest strategies.

• Whist inflation in Australia reduced to 2.1% in the June quarter, the September quarter’s result was a headline 3.2% and October’s a very high 3.8%. Current pricing suggests the Reserve Bank of Australia’s next  move will be a 25bps increase although this is unlikely to occur until 2026. Mixed economic outcomes create uncertainty around the direction of cash rates in USA and Australia so steadiness is favoured.

• Overall, our general portfolio preferences continue unchanged and centres on diversification. Volatile markets are likely to continue, and diversification continues to be essential in this environment. Over the long-term, we believe valuation matters and this continues to be our most important theme for investment today.

   

Major Market Indicators

Source: Morningstar, Trading Economics, Reserve Bank of Australia

Selected market returns in AUD – 12 months to 31 Dec 2025

US Growth Valuation ends year near record high