Global market update August

Global investment markets continue to navigate a complex mix of easing inflation, geopolitical uncertainty, changing interest-rate expectations and resilient corporate earnings. While recent inflation data in Australia and the US have provided some encouragement, higher energy prices and ongoing tensions around Iran remain important risks.

Against this backdrop, our base case remains constructive for risk assets, although we expect greater volatility and dispersion across investments.

Australian inflation provided some welcome news, with headline inflation easing to 3.8% in the year to June. The June-quarter CPI rose just 0.6%, while lower world oil prices and fuel excise relief helped automotive fuel prices fall sharply. Inflation also surprised to the upside in the United States. June CPI fell to 3.5%, while core inflation came in below expectations. Markets responded positively, with bond yields declining and rate-sensitive technology shares and gold strengthening.

\The US Federal Reserve held rates at 3.50–3.75% in late July, while the European Central Bank also paused at a deposit rate of 2.25%. Although both central banks remain focused on inflation, the decision not to tighten further provided some relief for markets.

China also delivered some encouraging news. The IMF upgraded its 2026 Chinese growth forecast from 4.4% to 4.6%, citing strength in high-tech manufacturing and exports. China’s Politburo also reaffirmed its focus on AI, electric vehicles and high-end manufacturing.

Energy remains one of the biggest risks. Brent oil moved back above US$100 a barrel following renewed disruption in the Middle East, potentially adding inflationary pressure just as central banks had begun making progress. Closer to home, the RBA continues to face the difficult combination of persistent underlying inflation and rising unemployment. Australian consumer spending has also slowed, while housing prices have weakened in some capital cities.

China’s property problems remain unresolved, with fixed-asset and real-estate investment continuing to fall. Japanese yen weakness and a more hawkish Bank of England are additional reminders that inflation and interest-rate pressures have not disappeared.

Our base case remains that the global economy continues to grow despite a more volatile environment. Corporate earnings remain resilient, government spending is supportive, and credit remains broadly available. However, geopolitical tensions and higher energy costs have complicated the inflation outlook and may keep interest rates higher for longer.

We continue to favour companies with strong structural growth prospects, including businesses positioned to benefit from investment in artificial intelligence, manufacturing and energy infrastructure. One area we are watching closely is the rising cost of AI infrastructure, particularly specialised chips, power and data centres. Our expectation is that leading companies have sufficient cash flow to continue investing, although persistently higher costs could eventually challenge valuations.

Overall, we remain constructive on risk assets but are maintaining slightly higher cash levels while uncertainty remains elevated.

Our key downside risk is a significant slowdown in consumer and business spending, particularly in the US. This could place pressure on corporate earnings at a time when equity valuations remain relatively high. Persistent oil price increases, renewed geopolitical escalation, elevated interest rates and a reduction in AI investment could amplify that slowdown. Further weakness in China’s property sector would also have implications for Australia through softer demand for resource exports. Under this scenario, a more defensive portfolio positioning would become appropriate.

Our optimistic scenario centres on geopolitical de-escalation, falling energy prices and easing supply pressures. A sustained ceasefire and full reopening of the Strait of Hormuz would improve the outlook for inflation and global growth. Lower AI development costs could also broaden the technology’s benefits across more industries, supporting productivity and corporate profits. Combined with credible inflation management, supportive government spending and healthy household and business balance sheets, this could create a favourable environment for investment markets over the medium term.