Five Themes Defining Markets in 2026

At our first major customer event of the year, held in Melbourne and in partnership with BlackRock, we brought together our investment experts to help make sense of it all. The conversation centered on five themes we believe will define markets this year.

You can watch the full video if you missed the action, or here’s a summary:

Theme 1: RBA and inflation – Higher for Longer

Inflation is back in focus for Australian households and investors. Prices are climbing across housing, electricity, and food. A tight labour market (more jobs than jobseekers) keeps wages up and piles on the price pressure. Against this backdrop, the Reserve Bank of Australia (RBA) became the first major central bank to hike rates in this cycle in February. Analysts, including those at Westpac, now expect another hike during the March meeting.

The picture for the economy is mixed. Demand remains strong, which speaks to the resilience of the Australian consumer. But persistently high inflation could erode purchasing power and compress disposable incomes, and rising financing costs would squeeze households harder still. We may see below-trend growth this year, until the RBA can declare victory over inflation.

What This Means for Your Portfolio: Build breadth, in and beyond the home market.

Theme 2: Australian Stocks: Choose Wisely

Tighter financial conditions generally dampen risk appetite. But not all industries will be impacted the same. Sector selection will be important in the Australian equity market.

Financial institutions could gain as interest rates go up. Gradually lifting interest rates would benefit financials as net interest margins widen. But unexpectedly sudden, large hikes could catch markets off guard and hurt investor confidence. There might also be less demand for bank loans in a slowing economy, weighing on this business.

Companies involved in mining and metals could be an interesting diversifier. Given that they export globally, they are driven by what happens abroad rather than in Australia. Among miners, those involved in gold stand out – given the structural demand from global investors as uncertainties rise. Many of them are smaller companies, which offer another layer of diversification outside of the big caps.

What This Means for Your Portfolio: Select sectors more likely to be insulated from domestic challenges.

Theme 3: Dealing with Geopolitical Risks

Unsettling as the War in Iran is, history shows that wars tend to have a short-lived impact on financial markets. It is the job of markets to price the future value of assets. Once there are signs of de-escalation or clarity around a resolution to a conflict, investors begin to shift their attention to the recovery and profit from depressed valuations. BlackRock says it is not “de-risking” (i.e. moving from equities to safer assets, like bonds or cash). Rather, the asset manager is diversifying. Gold continues to be an important part of this diversification amid safe haven demand. Learn more about how wars can impact your investments here.

What This Means for Your Portfolio: Don’t overreact to near-term headlines. Diversify.

Theme 4: AI Bubble? Or Start of a Supercycle?

AI is not a short-term phenomenon. In scale and significance, we believe it is comparable to the advent of the steam engine or electricity – a transformation that will drive meaningful productivity gains across the global economy over years and decades, not months.

Not all AI-exposed companies are equal. Investors are favouring those with greater discipline in spending amid exploding capital expenditures to finance AI projects. Among tech firms, software businesses are particularly vulnerable to AI’s disruptions to traditional business models.

Our preference is for hardware over software, a "picks and shovels" approach that captures the buildout of AI infrastructure. Asian semiconductor manufacturers stand out as significant beneficiaries of the supply constraints being driven by surging global demand.

Companies powering AI are big beneficiaries. The world’s existing energy infrastructure cannot cater to the intense demand required to train AI models. We are already seeing this demand materialise through the ramp-up in data centre construction. As our friends at BlackRock put it, “power is knowledge” in the age of AI.

What This Means for Your Portfolio: Don’t just chase the AI rally. Focus on the “picks and shovels”, favour hardware over software.

Theme 5: End of US “Exceptionalism”?

This is the idea that US businesses generate earnings growth so much stronger than companies elsewhere, it’s a no-brainer to favour US equities over other markets. It is a market narrative that’s taken hold over the last decade and a half, as US interest rates were largely kept low, powering growth, and has gained momentum with AI’s breakout developments since 2022.

That advantage is being tested. US equities underperformed major markets for the first time in two decades last year (with dollar weakness shaving another 9% off gains from non-USD investors). Many US companies remain exceptional, of course. But the risk-reward is lower now for adding exposure to a highly concentrated US market. There are other, equally exciting opportunities awaiting Australian investors who are willing to cast a wide net this year.

What This Means for Your Portfolio: Consider adding exposure beyond the US. Emerging markets, for example, do well historically when the USD is weak.

• Watch the full video.