Macquarie Group’s Chief Economist, Ric Deverell, looks at Australia’s position as global instability continues – covering domestic growth, Australia’s advantages as trade tensions endure, and the all-important cash rate.
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In addition to the economic outlook, we are pleased to share a report from the Macquarie Wealth Management Investment Strategy Team with their views on the road ahead for investors.
Key insights
2025 is shaping up as one of those years where those investors with discipline and conviction in portfolio management will be rewarded over those who try to pick winners. Macroeconomic and geopolitical forces have pushed and pulled sentiment in different directions at different points in time and there seems to be no end in sight.
In the first half of the year markets reacted to nearly every piece of information on trade tariffs coming out of the White House, but updates became more readily absorbed by the end of Q2. Resilient hard US economic data during the period provided the buffer even though it’s still too early to know the magnitude of the shock and the collateral economic damage. However, the threat was enough to cause large swings in US imports and business inventories, so the underlying drag on consumer spending, which is yet to play out, could be large as well.
Similarly, the inflationary consequences of tariffs are yet to occur. US margins and input costs at the macro level haven’t yet suffered and inflation remains well behaved. This has given room for central banks to pivot and support growth and at this stage they are easing to prop up growth next year rather than head off a recession. Normally bond yields fall when both policy and inflation are easing, but this hasn’t been the case thus far. We highlighted a few weeks ago that global savings and investment are no longer widening, and this is helping put a floor under bond yields that will mean that even if a recession develops policy and inflation are not likely to test the zero bound.
In our 2025 outlook we warned that geopolitics would drive asset class and regional returns and its clear this will likely continue. The Middle East conflict that began confined to Israel and Hamas has escalated, with Iran and its nuclear capabilities now the focus. No one knows where this will go, but further escalation remains possible. The conflict has halted the equity market rally and bumped up the gold and oil price, but markets remain remarkably resilient thus far.
These uncertainties mean it’s easy for investors to get wrong footed taking big bets. We believe diverse portfolios are the best way to navigate this uncertainty and we continue to think investors should do this in several ways.
- Private and alternative assets are our preferred strategy for mitigating near-term volatility and protecting against downside risks to growth.
- In fixed income, lock in higher ‘all-in yields’ in quality fixed rate credit alongside floating rate senior secured private credit.
- In equities, we prefer EM, Europe and Japan over Australia and the US. Both Australia and the US are expensive and highly stock concentrated markets. Australia has the additional headwind of a weak earnings outlook. Europe and Japan are more diversified markets than Australia and the US, and they have a solid earnings outlook with more attractive valuations.
The key investment themes underpinning our portfolio positioning includes:
- The US remains the global growth engine. It is slowing but should pick up next year.
- The disinflation process is near its end, but policy will likely ease further.
- Stock concentration is a key risk in the US and Australia.
- Longer dated bond yields are unlikely to fall significantly further even as policy rates come down.
- Military conflict is highly unpredictable. The immediate threat is escalation rather than de-escalation.
We are more certain that central banks have the room to support any unexpected slide in growth than we are about a return to a more stable trade and geopolitical outlook, so any positive surprises for markets are likely to come from central banks having more conviction about cutting rates. The list of potential negative surprises seems to far outweigh potential positives, so investors should buckle up and be well prepared to ride out the remainder of the year.
- Paul Huxford
Chief Investment Officer
Macquarie Wealth Management
Investment implications
| Asset class | Asset class comment | Preferences |
|---|---|---|
Cash (Australia) | Cash yields are falling. The RBA is expected to lower the cash rate by 75bps before year end. Investors should consider locking in higher ‘all-in yields’ further out on the yield curve. | Maintain levels sufficient for transaction and liquidity purposes. |
Equities | Equities normally rally through slowdowns and provided this is what we see during the remainder of the year we maintain a 'neutral' stance on equities despite extended valuations, optimistic earnings projections, and the still uncertain path of trade policy. We favour value-oriented sectors, which benefit from more reasonable valuations, deregulation, and the broadening of economic activity beyond AI infrastructure-driven spending. Regionally, we identify better opportunities outside the US, driven by more compelling valuations and improving sentiment, supported by increased fiscal spending and accommodative central banks. | Markets: Favour allocations outside the expensive and highly stock concentrated US and Australian markets. Overweight Europe, Japan and emerging markets through underweights in US and Australia. Size: Bias toward small cap over large cap stocks, but acknowledge that a more attractive entry point is needed to have strong conviction. Style: Favour value over growth, given central banks have room to lift cyclical economic growth next year, bond yields are likely to remain relatively high, and IT earnings growth is likely to slow. |
Fixed Income | Higher all-in yields for fixed income provide an attractive longer-term allocation, downside protection and a ballast to an overall portfolio. Preferred positioning is via a barbell approach, combining higher quality, shorter-dated credit on the core duration side with defensive floating rate senior secured, non-cyclical private credit. Credit fundamentals remain supportive, with strong demand in the primary issuance market for both investment grade and high yield. | Sovereign: Prefer mid-curve maturities over the long-end, which will be less sensitive to tariffs and term premia. Investment Grade: High yields and credit fundamentals remain supportive. Overweight, negative net issuance and flows to support valuations. High Yield: Neutral on a risk adjusted basis, supportive fundamentals (low defaults) and sound growth will likely support accruals offsetting potential credit spread widening from historically tight levels. Emerging Markets: Neutral, as sustained USD strength and tariffs will be a headwind to returns and credit profile against lower debt levels than DM, higher real policy rates and geopolitical tailwinds (de-globalisation). |
Private Credit | Continues to offer a premium (illiquidity) over public fixed income markets, while also providing structural protection in the form of seniority, documentation and a bias to defensive industries. | Core: Prefer less crowded and more lender friendly segments such as US middle market direct lending, European direct lending and asset-based finance. |
Alternatives | Private Equity: Direct transactions face headwinds, although manager skill can help navigate uncertainty and identify opportunities. Greater policy clarity in 2H25 should support recovery in activity. Hedge funds: Lingering macro uncertainty and geopolitical and policy risks will keep volatility in play, benefitting hedge funds’ ability to harvest alpha from market inefficiencies and dislocations. | Private Equity: Prefer lower to middle market buyout relative to large buyout, secondary strategies where operational value creation is the main return driver and recent vintages. Hedge funds: Prefer multi-strategy funds that employ disciplined risk frameworks and can nimbly allocate across asset markets. |
Real Assets | Real assets offer stable income, inflation hedging, and diversification, and are less impacted by tariff policies due to their contracted cash flows, positive correlation to inflation, and strong fundamentals. Infrastructure: Will continue to benefit from structural tailwinds of deglobalisation, digitalisation, the energy transition and supply/demand shortfall. Property: Income growth opportunities remain with industrial, while commercial real estate is likely at, or approaching, the turning point in valuations. | Infrastructure: Prefer core, unlisted, infrastructure due to valuation (EV/EBITDA) discounts to listed markets. Property: Prefer industrial over commercial, retail and office. |
Global Economics
- It’s too early to estimate the cost of US trade policy, but thus far the global economy has remained resilient. Inflation will likely settle near central bank targets. Policy is heading to more neutral settings, causing growth to pick up a touch next year.
- The European Central Bank is close to the end of its easing cycle, while the Fed and RBA have more work to do.
- China will probably need to pull policy levers to achieve its growth target, particularly if the current trade reprieve gives way to tit-for-tat tariff increases.
- Australian consumers have saved the increase in real income that has come with the decline in inflation.
"[US] Hard data on spending and investment remained generally resilient but pockets of weakness are emerging…Macquarie’s economics team expects US GDP growth to slow to around 1% in Q4 from 2.4% in Q1 25."
- Shane Lee
Investment Strategist
Macquarie Wealth Management
Global Equities
- The increase in global economic risks over the past few months is not factored into the price of equities. But more positively, we’re confident that lower policy rates will help bump up growth next year.
- The most recent US reporting season showed few concerns about US IT earnings, but sector top line growth has probably peaked, and bond yields look set to remain higher than the near-term policy and growth outlook would suggest.
- The combination of the geopolitical risks around an otherwise positive cyclical backdrop, at peak cycle IT earnings leaves us cautiously positive on global equities, but we think the best way to express this is via a tilt to Emerging Markets, Japan and Europe over the US and Australia.
"Investors should note that equities normally rally through slowdowns and, provided this is what we see during the remainder of the year, they should remain invested but manage risks via regional, style and size tilts."
- Dean Dusanic
Head of Equities and Real Assets
Macquarie Wealth Management
Australian Equities
- At this stage, we don’t expect a global recession and prefer markets other than Australia. But investors should hold a solid portfolio weight in Australia as a line of defence against market volatility.
- We acknowledge Australia’s fundamentals are poor relative to our preferred markets of Europe, Japan and Emerging Markets. However, its stock concentration has an overlay of defence, built on sticky income that is valued during periods of volatility, particularly when global bond yields are rising.
- The lift in earnings growth analysts expect leaves the market a little short of our preferred markets and it comes with a valuation premium that we don’t think is worth paying for investors contemplating entering the market.
"Australia’s large concentration in two stocks carries with it more risk than other markets, but the large stock concentration in the banks is also a safety net. Around 47% of the stock is held by retail investors locked into receiving their dividends biannually."
- Dean Dusanic
Head of Equities and Real Assets
Macquarie Wealth Management
Fixed Interest and Public Credit
- In fixed interest and public credit markets, the prevailing 'yield dilemma' theme continues to favour attractive 'all-in' yields for most investors, rather than focusing on relatively tight credit spreads.
- Periods of volatility will test the underlying momentum generated by the global easing cycle, healthy corporate fundamentals, resilient economic growth, and robust technical demand, all of which support the reach for higher yields.
- We continue to advocate a diversified barbell strategy, balancing overall duration and higher quality public credit and regional diversification alongside floating rate senior secured private credit.
"Investors should prioritise quality and diversification in their portfolios and take advantage of attractive ‘all-in’ yields, with supportive breakevens and some downside protection."
- David Carruthers
Head of Fixed Income
Macquarie Wealth Management
Private Credit
- Private credit will continue to offer attractive ‘all-in’ yields over public fixed income given a higher for longer base rate, added risk premia and structural seniority.
- However, we expect to see greater performance dispersion across managers, where those with better underwriting standards and deployment discipline over the past few years are likely to be rewarded.
- A growing opportunity set in asset-based finance and opportunistic credit can help diversify away from corporate direct lending and reliance on sponsor-backed / M&A deal flow.
"Private Credit remains a strong income generator in a higher for longer environment. However, rising loan dispersion means careful manager selection is needed to mitigate performance drag from credit losses."
- Shirley Huang
Senior Investment Analyst, Alternatives
Macquarie Wealth Management
Alternatives
- Alternatives remain an important provider of diversification, alpha generation and downside protection amidst lingering risks that keep volatility and uncertainty in play.
- Although private equity direct transactions face headwinds, manager skill can help navigate uncertainty and identify opportunities. Greater policy clarity in 2H25 should support recovery in activity.
- Hedge funds have the ability to capture uncorrelated alpha through changing market conditions, while offering downside protection. However, allocation challenges in this sector including access, transparency and high costs.
"Traditional IPO and strategic sale routes remain narrow, and distributions back to investors continue to lag, spurring both managers and limited partners (LPs) to explore secondaries as avenues to return capital and/or achieve partial exits."
- Shirley Huang
Senior Investment Analyst, Alternatives
Macquarie Wealth Management
Real Assets
- We like real assets which we believe offer compelling risk-adjusted returns with limited directional exposure to public markets.
- Unlisted infrastructure offers attractive fundamentals, long-term visibility and structural tailwinds from decarbonisation, digitalisation, and deglobalisation.
- Real estate remains mixed, with strong demand for logistics, residential and specialty sectors, while challenges persist for office and some retail. Overseas listed REITs are currently trading on a substantial discount (-9.5%) to net tangible assets and may present tactical dislocations.
"Real Assets are less likely to feel the full force of tariff policy given their contracted cash flows, positive correlation to inflation and healthy fundamentals."
- Dean Dusanic
Head of Equities and Real Assets
Macquarie Wealth Management
Continue reading
We hope you found our insights valuable as we continue through the remainder of 2025 and beyond. If you would like to continue reading, you can access the full 2025 mid-year outlook.
Additional information
This Report was finalised on 27 June 2025.
Recommendation definitions (Macquarie Australia/New Zealand): Outperform – return >10% in excess of benchmark return Neutral – return within 10% of benchmark return Underperform – return >10% below benchmark return.
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