As we move through 2026, the global investment environment is evolving rather than weakening.
While growth is expected to moderate in the near term, the foundations for a continued expansion, particularly into 2027, remain firmly in place.
At the centre of this outlook is a powerful structural shift: the global investment cycle is increasingly being driven by capital expenditure, markedly in artificial intelligence (AI), energy security, defence, and infrastructure.
For investors, this creates both opportunity and complexity - requiring a disciplined, forward-looking approach to portfolio positioning.
A global economy in transition
Global growth is expected to slow modestly in 2026 before stabilising and strengthening into 2027.
- The United States remains relatively resilient, supported by strong corporate earnings and significant investment in AI infrastructure.
- China is stabilising, with growth supported primarily by exports, though domestic demand remains more subdued.
- Europe faces near-term pressure, particularly from higher energy costs, but is expected to recover gradually.
At the same time, the global economy continues to navigate ongoing geopolitical tensions and energy market disruptions, which are contributing to short-term volatility.
Inflation and interest rates: a delayed normalisation
Inflation dynamics remain a key influence on markets.
- Global inflation is expected to rise in the near term before peaking in the second half of 2026.
- A return to disinflation is anticipated in 2027, although the pace will vary across regions.
Central bank policy is expected to diverge:
- The US Federal Reserve is likely to remain cautious, delaying rate cuts until clearer signs of disinflation emerge.
- The European Central Bank is managing an energy-driven inflation shock.
- The Bank of Japan continues a gradual normalisation path.
For investors, this environment suggests higher-for-longer interest rates in the near term, followed by gradual easing.
Australia: a more challenging domestic backdrop
In contrast to global trends, Australia faces a softer near-term outlook.
- Consumer demand and housing activity are expected to weaken, reflecting higher interest rates and tighter policy settings.
- Household income growth is slowing, and unemployment is expected to rise modestly through 2026.
However, there are important offsets:
- Large-scale structural investment - including energy transition, infrastructure, mining, and data centres - continues to support economic activity.
This creates a “two-speed” economy, where investment remains strong even as consumption slows.
The dominant theme: capex over consumption
A defining feature of the current cycle is the shift from consumer-led growth to investment-led growth.
AI-related capital expenditure is expected to remain a key driver of:
- Global trade
- Corporate earnings
- Market leadership across sectors and regions
This investment cycle is broadening beyond technology into:
- Power and energy infrastructure
- Industrial equipment
- Defence and supply chain resilience
For investors, this reinforces the importance of aligning portfolios with structural growth trends rather than short-term cyclical signals.
Asset allocation: where we see opportunity
In the current environment, portfolio positioning remains constructive, but selective.
Equities: preferred over credit
Equities continue to offer more attractive risk-return potential.
A strong preference for US equities reflects resilient earnings and continued AI-driven growth.
- Japan remains well supported by structural reforms and improving returns on equity.
- Emerging markets are less favoured, reflecting valuation and macro considerations.
- Australian equities are underweight relative to global markets, given domestic economic headwinds.
Fixed income: selective opportunities
Fixed income remains less attractive overall, particularly in investment grade credit.
- Greater value is seen in high yield and securitised credit globally
- In Australia, floating-rate credit remains more resilient
Alternatives: enhancing diversification
Alternative investments play an increasingly important role in portfolio construction:
- Commodities, including gold
- Hedge funds
- Private investments
These exposures can help manage volatility and enhance diversification.
Currency outlook: supportive for the AUD
The Australian dollar is expected to benefit in the near term from:
- A cyclical softening in the US dollar
- Relatively attractive yield differentials
Looking ahead: opportunity with volatility
While uncertainty remains elevated, the broader outlook is constructive.
- Risk assets are expected to perform strongly into 2027
- However, volatility is likely to persist, driven by geopolitical events and inflation dynamics
For investors, this environment reinforces the importance of:
- Staying invested in growth opportunities
- Maintaining global diversification
- Positioning portfolios for structural themes rather than short-term noise
Key takeaway
The current cycle is being shaped by a fundamental shift toward investment-led growth, particularly driven by AI and infrastructure.
While Australia’s near-term outlook is more subdued, global opportunities, especially in developed markets remain compelling.
A disciplined, globally diversified approach remains essential to capturing these opportunities while navigating ongoing market volatility.
