CFS Market Insights: What's shaping the outlook for 2026

00:00:00:09 - 00:00:23:15

Unknown

Welcome to CFS Market Insights. So we’re going to start off talking a little bit about what happened in 2025. And if we go back 12 months ago, we were talking about a couple of things. The first one is that we thought there would be a broadening out of returns from a wider range of investment asset classes.

 

00:00:23:17 - 00:00:31:13

Unknown

And also we expressed a bit of caution about how markets would perform. You’d had a good couple of years of returns.

 

00:00:31:15 - 00:01:04:02

Unknown

And we thought that actually, you’d possibly see returns move back towards longer term averages. So the good news for our members is that we were wrong about market returns possibly moving back to longer-term averages. And we continue to see strong returns, particularly from equities. What we have seen, though is greater diversification within equities. And so I think it's probably worth touching on that.

 

00:01:04:04 - 00:01:12:24

Unknown

So let's touch on how equity markets performed in particular, because we see some quite divergent returns from different parts of the world.

 

00:01:13:05 - 00:01:35:04

Unknown

Now you're right. There was definitely a broadening out. The honour roll looked quite different last year: emerging markets were at the top, then global equity hedged, unhedged, and then Australia bringing up the rear. But it was very much US equities not dominating for first time in a few years. As it turned out, if we go through specifics, China was the strongest market. So unexpectedly China did really well, at about 30% last year. 

 

00:01:35:04 - 00:01:55:14

Unknown

It was a mix of Chinese government policy really supporting equities, but also, Chinese AI companies doing extremely well. Alibaba has basically built a cloud infrastructure that returned like 70% last year. So China was number one last year. 

 

00:01:55:16 - 00:02:29:11

Unknown

And then second was Japan. So not far behind, around 25%-26%. We saw Japan doing really well. A mix there of a really weak yen, always helps and then new Prime Minister Takahashi saying she really wants to support growth policies, so that drove Japanese equities for the first time since 1990 the TOPIX got to 3000 so what’s that, 35 years to make new highs in the TopEx. So that’s sort of maybe a cautionary tale for what can happen when things get over-valued. So that was sort of the hierarchy. And then Europe even came in, and then US came in after those. So for the first time in quite a while, as I said, US wasn't dominating everything that was going on in equity markets.

 

00:02:29:13 - 00:03:01:15

Unknown

But I think the key thing to emphasize is it’s been another very strong year for member returns, and we'll see an awful lot of our members see double digit again, for the third year running. Which is a great result. People have seen balances probably move up over a third over the last three years or so. So with that backdrop, we’re now turning towards what we think may occur now in the next coming 12 months or so.

 

00:03:01:17 - 00:03:14:14

Unknown

And so I think it's probably worth talking a little bit more about that broadening out that you talked about and we have definitely seen, particularly in the last six months or so. 

 

00:03:14:14 - 00:03:26:14

Unknown

And really a greater set of returns coming from different parts of the market. And I think it’s probably worth diving into why we think that’s likely to continue.

 

00:03:26:16 - 00:03:46:00

Unknown

Yeah. No. You're right. Our expectation is that this definitely will continue. Cracks are appearing in US large caps, particularly US IT. We saw issues last year. There was this circular financing moving from NVIDIA into OpenAI into Oracle. And there were other ecosystems that looked like that.

 

00:03:46:01 - 00:04:13:18

Unknown

So that was one of the issues. The GPU versus TPU debate between NVIDIA and Google. And then also energy constraints. You saw energy prices go up quite a bit. So there were a number of things that started to create small cracks. IT still did well last year. Then this year - well, late last year and then into the start of 2026 – you’re seeing the software issues. ‘SAAS-mageddon’ I saw it called. Software as a service – SAAS. You’re seeing some of those companies doing really poorly. 

 

00:04:13:18 - 00:04:45:20

Unknown

Adobe, Intuit, ServiceNow and Salesforce, all $100 billion-plus companies are all down over 30% in the last three months. So AI disruption has really started to hit hard. So it’s gone hard through the SAAS companies, as I just said. We don't expect it to stop. AI disruption is going to have impact across a number of different industries, not just software, so it makes sense that this is going to have a ripple effect.

 

00:04:45:22 - 00:05:17:24

Unknown

I think that's a really important point. And it's one of the reasons why we think that management is going to become so important in this evolving environment. That actually, old fashioned stock picking is really to come to the fore as active managers look to work out how businesses and sectors are going to be impacted, not just by AI but by some of the other things, structural changes, that we see coming.

 

00:05:18:01 - 00:05:38:09

Unknown

And we’ve already started to see that in terms of our active managers over the last three to six months, really doing a great job for our members. And I think it probably also feeds into one of the other things that we've been talking about in the Investment team, which is around valuation.

 

00:05:38:11 - 00:05:45:14

Unknown

Yeah. And as an outlook, it’s hard to avoid the fact that a lot of things look expensive but they’re still areas we think are attractive.

 

00:05:45:14 - 00:06:16:06

Unknown

So we’ve already talked about emerging markets. We’ve made some changes over the portfolios over a number of years to increase emerging markets. That's still one of our favorite plays. But smaller companies – US – don’t through the baby out with the bathwater. US large caps still look expensive, US small caps are cheap. We always thought it didn’t make sense that all the benefits of AI would accrue to six companies. It just didn’t feel right. And you’re starting to see that play out. You’re seeing it slowly drift down through the ecosystem. It’s now drifting down to small caps as well. So we think smaller companies in the US will do really well.

 

00:06:16:06 - 00:06:48:21

Unknown

And the other one we think will do well is value equities. So that's another of those valuation gaps you’re talking about. Growth equities – expensive, value equities – quite cheap. If the US is going to re-industrialise, if all these companies are going to move from capital-light to capital-heavy, in the sense they need to rebuild their infrastructures – they’re all building chips and data centres and all this sort of stuff: that all requires materials. It’s a physical world, so materials do well, energy does well, electricity and utilities do well, those sorts of things. They’re value equities. That’s an area we think will look really good going forward.

 

00:06:48:21 - 00:06:53:23

Unknown

We’ve already got some of that in the portfolio. We’re very early on the trade. But we think it's been doing well recently, and we think it will continue to do well next year – this year. 

 

00:06:54:00 - 00:07:06:17

Unknown

And I think that ties into this idea that we do think we're moving into quite a different market environment where diversification is going to become, increasingly important.

 

00:07:06:19 - 00:07:33:11

Unknown

So one of the other things that, as investors, we need to be aware of is where we are in the political cycle, particularly in the United States, we’ve got midterm elections coming up in the United States. We've already seen early in 2026 a couple of more populist policy announcements, from the Trump administration, around credit cards and around institutional investment in the housing market.

 

00:07:33:13 - 00:07:57:22

Unknown

And we're also seeing continued focus on budget deficits. And it does seem that the market is again moving back to starting to think about, first of all, the size of the budget deficit in the US but also becoming perhaps more wary that as we move towards the mid-terms you might see some more populist policies. Interesting to get your thoughts on that too.

 

00:07:57:24 - 00:08:08:21

Unknown

No, you're right, and yes, so we’re expecting the Trump administration to become a bit more domestically focused, moving to the mid-terms I think it makes sense. I mean, they’ve just done Venezuela and Greenland and Iran right now as we’re talking so they’re obviously off piste at the moment. 

 

00:08:08:23 - 00:08:35:15

Unknown

It wouldn't be a surprise to see them come back onto the tracks to get ready for the mid-terms. The US dollar has been falling, as we’re all aware. As we did last year, we expect that to continue this year. So we have been hedging more of our portfolios. So our hedge ratios across most of our portfolios are somewhere between 35%-40% of our global currency exposure. 

 

00:08:35:17 - 00:09:03:01

Unknown

So we're very much looking at more Aussie dollar. The other thing is gold’s telling us something. Now, gold is difficult to get into portfolios because you’re trying to work out what role it plays. In the past, when real rates were rising, gold would do badly. Well that’s the opposite. Last year, real rates rose and gold did really well. When the US dollar’s falling, gold does well. Well, that’s been OK but even when the US dollar was rising, gold was still doing really well. And the other one was when inflation is high, gold does well. Well, inflation was under control the last year or 18 months, and gold’s done really well.

 

00:09:03:03 - 00:09:32:24

Unknown

So gold is doing something different. We think it's just a store of value, so gold is just representing what it’s represented for thousands of years, which is you can just hold it, hide it, and no one can take it from you – and that’s why gold’s doing well. And that rings alarm bells for usual defensive assets like the US dollar, but also for US Treasuries and actually most developed market government bonds – those sorts of things. So we're looking, and we’ve already done some of this, but we’re looking for a way of diversifying our defensive exposure.

 

00:09:33:01 - 00:09:56:13

Unknown

So you can't ignore what's going on in gold. So in the same way that we talked about the broadening out in equities, in growth assets, we expect a broadening out in defensive assets as well. It's already happening. We’ve been adding inflation-linked bonds, which we’ve already done, minimising our duration in the US. We’re also looking at emerging market debt at the moment, so opportunities are presenting themselves there, just ways of broadening out our defensive exposures to make the overall portfolios more resilient.

 

00:09:56:15 - 00:10:37:01

Unknown

So all the things you’ve just been talking about, whether or not it's within the fixed income, assets or within equities, is all around diversification and us building resilience into our investment portfolios and we move into this evolving market environment, but also with a backdrop where policy continues to be volatile, we actually do think that this is going to be a very important component to the way that we’re  constructing our portfolios, and we think helps set up the portfolios to deal with what is a continuing, and rapidly evolving, investing environment.

 

00:10:37:03 - 00:11:01:08

Unknown

Absolutely. One of the things that we will talk about in coming episodes is all about how does that feed through into what happens here in Australia? And the fact that Australia is running a slightly different interest rate policy compared to many other central banks, and is also dealing with a different set of inflationary pressures. Absolutely.