Investment Market Update – July 2026

Geopolitics and Inflation Remain Key Risks

The conflict involving Iran and disruptions to global energy markets have contributed to higher oil and gas prices, keeping inflation more persistent than many investors expected at the start of the year.

While access to the Strait of Hormuz remains uncertain, elevated energy costs are expected to continue weighing on consumers and businesses.

As a result, central banks are becoming increasingly cautious, with interest rates likely to remain higher for longer than previously anticipated.

The AI Boom Continues, But Leadership Is Broadening

AI remains the dominant driver of global equity markets. Significant investment in data centres, semiconductors, cloud computing and digital infrastructure continues to support strong earnings growth across the technology sector.

However, there are growing questions around whether the enormous level of capital being invested can ultimately deliver the returns currently embedded in market valuations.

Importantly, investment opportunities are expanding beyond the large US technology companies that initially led the AI rally. Beneficiaries now include semiconductor manufacturers, industrial companies, power infrastructure providers, financial services firms, and selected healthcare businesses that are adopting AI to improve productivity.

This broadening of market leadership reinforces the value of maintaining diversified exposure across sectors and regions.

Why Australia Lagged Global Markets

A notable feature of the 2026 financial year was the Australian share market’s underperformance relative to global equities. The key reason was sector composition.

Global markets were led by AI-related technology, software and semiconductor companies, while the Australian market remains heavily concentrated in banks, mining companies and dividend-paying sectors.

Australia has relatively limited exposure to the companies benefiting most directly from AI investment.

At the same time, concerns about China’s property sector and slower domestic demand weighed on sentiment toward our trade with China.

Higher bond yields also reduced investor enthusiasm for many traditional Australian income-focused sectors, such as industrials, retailers and the media.

As a result, investors with meaningful exposure to US tech stocks, the Japanese share market, and selected emerging markets generally outperformed portfolios that were mostly concentrated in Australian shares.

Opportunities Beyond the United States

While US companies continue to generate strong earnings growth, investors are cautious that the period of overwhelming US market dominance may be gradually moderating.

High valuations, widening fiscal deficits, and expectations of a weaker US dollar may create more favourable conditions for non-US markets over the coming years.

Japan remains particularly attractive, supported by ongoing corporate governance reforms, improving shareholder returns and stronger profitability.

Emerging markets are also benefiting from AI-related manufacturing, including semiconductor production. The South Korean KOSPI index is up 125% over the last 12 months.

While China continues to face challenges from weak consumer confidence and property market pressures, select opportunities remain in technology, industrials, and income-producing companies.

Higher-for-Longer Interest Rates

A recurring theme concerning investors for the remainder of the year is the likelihood of structurally higher bond yields.

Governments in the US, Europe and Japan continue to run significant fiscal deficits while increasing spending on defence, infrastructure and energy security. This growing supply of government debt may require investors to demand higher yields over time.

In this environment, companies with strong balance sheets, reliable cash flows and pricing power may be better positioned than highly leveraged businesses.

Value-oriented sectors such as financials, industrials and selected infrastructure assets may also become increasingly attractive relative to expensive growth stocks.

Investment Implications

The key message for investors is not to retreat to cash and to remain diversified and focused on long-term opportunities.

As leadership broadens beyond US mega-cap technology companies, investors may benefit from greater exposure to international equities, infrastructure, alternative assets, and selectively managed fixed-income strategies.

While uncertainty remains elevated, the investment landscape is becoming increasingly global.

For long-term investors, diversification across regions, sectors and asset classes remains the most effective way to capture opportunities while managing risk in a rapidly changing world.