Geopolitical tensions failed to derail markets and earnings, especially in the U.S. where they surpassed expectations. Emerging markets led performance, with investors attracted to better value AI exposures and the longer-term corporate reform theme, while Europe and Japan outpaced the US. In Australia, resources and mid-caps were key winners. Overall, most asset classes delivered strong returns in 2025. 

 

The MSCI World ex Australia index returned 0.8 per cent for the month with a calendar year gain of 21.2 per cent. In AUD terms the index was up 12.5 per cent for the year with hedged returns higher at 18.7 per cent. For the year, Europe was up 35.5 per cent, with the USD’s 13.5 per cent depreciation against the euro a major contributor. Although Japan was relatively flat in December the 2025 return in USD terms was 24.6 per cent, outpacing the US which gained 17.3 per cent.  2025 marked a rotation away from US equities and, for some, possibly signalled the end of US exceptionalism. The US market was heavily impacted early in the year by the prospect of an average tariff rate of 30 per cent, the highest in a century, threatening recession and higher inflation. However, as the Trump administration backed down on tariffs to a more manageable 10 per cent average rate, markets steadily recovered. US economic growth remained resilient, supported by spending by higher income cohorts and an AI capex boom. US corporate earnings were around 13 per cent higher, much stronger than earlier anticipated.

 

The Australian equity market outperformed global markets in December as its two largest sectors, banks and materials, performed strongly. The ASX 200 rose 1.3 per cent in December taking the annual gain to 10.3 per cent, well below global benchmarks. Banks gained 4.7 per cent and resources 6.7 per cent, ending the period of mid-Cap outperformance. The ASX50 rose 1.8 per cent, led by CBA (5.3 per cent), Rio (11 per cent) and BHP (9.2 per cent). For the year CBA was up just 4.8 per cent, lagging BHP’s 15 per cent and Rio’s 25 per cent. Strong gold and copper prices and higher-than-expected iron ore supported resources while CSL fell another 7.3 per cent in December, bringing its annual decline to 39 per cent. The market has been plagued by relatively weak earnings growth, disappointing guidance for key stocks and, in the past few months, a sharp reversal in interest rate expectations.

 

Emerging markets delivered their strongest return since 2017, rising 33.6 per cent in 2025, and outperformed developed markets for only the third time in nine years. All regions performed strongly with Europe and Latin America up 55 per cent while Asia, which accounts for around three quarters of the index, was up 32 per cent. The rally accelerated after April, assisted by falling inflation, global interest rate cuts, a weaker USD and spillover of AI enthusiasm. Cheaper valuations and China’s ability to diversify its trading partners while confronting significant tariff increases also helped drive capital flows to emerging markets.

 

Listed Property and Infrastructure assets enjoyed a solid year, although both lagged higher beta equity markets. Global REITs lost 1.4 per cent in December, trimming annual gains to 7.5 per cent while Global infrastructure gave up 2.1 per cent in December to produce an 11.5 per cent return for the year. AREITs managed to rise in December, ending the year up 9.2 per cent.

 

Major central banks around the world delivered 32 interest rate cuts in 2025 with emerging economies cutting a further 51 times during the year. The US Fed cut rates three times in the second half of the year as unemployment crept higher while the ECB, in response to inflation back at target and growth moderating, led the way with eight rate cuts to end the year at 2.15 per cent. The Bank of England lowered rates on three occasions, reaching 3.75 per cent. The Global bond index returned 4.4 per cent for the year.

 

Australian 10-year bond yields moved in the opposite direction to US bond yields as higher than expected inflation in the second half of 2025 and a reassessment of the outlook for RBA cash rate cuts lifted the domestic 10-year yield from 4.4 per cent to almost 4.8 per cent. The two-year yield ended the year at 4.06 per cent after reaching a low of 3.2 per cent mid-year. The Bloomberg Composite bond index returned 3.2 per cent for the year.

 

 

Market sentiment remains broadly positive, supported by the outlook for growth, rates and earnings.

 

After three years of strong returns, it’s inevitable that investment returns will slow. We have seen a bit of that in 2025 but expect a further slowing in 2026.

 

Global and Australian share returns are expected to slow further in the year ahead to around 8%. Stretched valuations in the key direction setting US share market, political uncertainty associated with the midterm elections (which years have seen below average returns and increased volatility) and AI bubble worries are the main drags but returns should still be positive thanks to Fed rate cuts, Trump’s consumer friendly pivot and solid profit growth. A return to profit growth should also support gains in Australian shares even though the RBA may have finished cutting rates. Another 15% or so correction in share markets is likely along the way though.

 

Bonds are likely to provide returns around running yield.

 

Unlisted commercial property returns are likely to stay solid helped by strong demand for industrial property associated with data centres.

 

Australian home price growth is likely to slow due to poor affordability, rates on hold with talk of rate hikes and APRA’s move to ramp up macro prudential controls.

 

Cash and bank deposits are expected to provide returns around 3.6%.

 

The $A is likely to rise as the interest rate differential in favour of Australia widens as the Fed cuts and the RBA holds and possibly hikes. Fair value for the Australian dollar is around $US0.73.