Quarterly economic update: October - December 2025

Key events: quarter to 31 December 2025

The December quarter of 2025 marked a period of mixed economic signals and divergent asset class performance, reinforcing the importance of diversification and disciplined portfolio construction. While global share markets continued to benefit from technology optimism and easing monetary conditions in parts of the world, inflation persistence, valuation concerns and geopolitical risks remained prominent themes.

Global market overview

Global share markets delivered modest gains over December, rising 0.8% in hedged terms, although a strengthening Australian dollar detracted from unhedged returns, resulting in a -0.6% outcome for Australian investors holding offshore assets without currency protection.

US equity markets briefly reached new historic highs, supported by a 0.25% interest rate cut by the US Federal Reserve. However, gains moderated as investors became increasingly cautious about elevated valuations. Economic data from the US remained mixed, with solid consumer spending and modest employment growth offset by the unemployment rate rising to a four-year high of 4.6%. Encouragingly, US inflation continued to ease, with annual consumer inflation moderating to 2.7% in November, down from 3.0% in September.

European equity markets performed strongly during the period, underpinned by stable inflation around 2% and improving business confidence, while Asian markets produced varied outcomes. Japanese equities delivered solid gains despite a rise in local interest rates, whereas Chinese share markets edged lower as weak retail spending and ongoing property sector challenges weighed on sentiment.

Australian share market performance

Australian equities recorded modest gains in December, although performance across sectors varied significantly. The Resources sector rose 5.8%, driven by higher gold and industrial metal prices. Financial stocks, including the major banks, also performed well with a 3.4% gain.

These positives were offset by sharp declines in Information Technology (-8.1%) and Health Care (-7.0%), which acted as a drag on broader market performance. Consumer Discretionary shares also weakened, falling 2.7%, as expectations for further interest rate relief faded.

On a quarterly basis, Australian shares declined -0.9%, with technology stocks particularly weak. In contrast, the Materials sector stood out as a key contributor to returns, rising 13.0% over the quarter. Understanding how sector rotation affects your portfolio is part of the work our financial planning advisers do with clients each quarter.

Economic conditions in Australia

Australian economic data throughout the quarter was mixed. Consumer spending showed signs of improvement, while employment conditions softened, with weaker jobs growth reported in November. The unemployment rate remained broadly stable around 4.3%, indicating continued resilience in the labour market.

Inflation, however, remains a key challenge. Headline consumer inflation rose to 3.8% in the year to October, exceeding expectations and reinforcing concerns that inflationary pressures have not yet been fully contained. As a result, market expectations for near-term interest rate cuts diminished over the quarter.

The ongoing cost-of-living pressures, including higher prices for essentials such as food, health and housing, continue to place strain on household budgets, particularly following the conclusion of temporary electricity rebates. For clients nearing or in retirement, sustained inflation has a direct impact on real purchasing power and income adequacy.

Fixed income and other asset classes

Bond markets delivered subdued results. Global bonds (hedged) produced a 0.7% return over the quarter, supported by lower US interest rates but offset by concerns surrounding government debt levels and rising yields in Japan. Australian bonds declined by -1.1%, reflecting renewed inflation concerns and speculation around future monetary policy adjustments.

Property securities delivered mixed outcomes, while cash returns remained relatively attractive, benefiting from elevated short-term interest rates. These dynamics highlight why superannuation investment option reviews matter — what worked in a falling-rate environment may not be optimal now.

Key risks and considerations for investors

Several risks remain relevant for investors as conditions evolve:

• Persistent inflation, both domestically and globally
• High equity valuations, particularly in US markets
• Geopolitical tensions, including conflicts in Europe and the Middle East and more recent US actions abroad
• Trade and political uncertainty, particularly involving the US and China
• Currency volatility, impacting international investment returns

These factors highlight the importance of maintaining a well-diversified investment approach, balancing growth assets with defensive exposures, and remaining focused on long-term objectives rather than short-term market movements. Remember that market corrections are normal, and downturns often create future opportunities. Speak with your wealth creation adviser if you have concerns about how your portfolio is positioned.

For any advice or assistance with regards to your investments and plans for the future, contact us today.

Asset class summary — 31 December 2025