2025 Financial Year (FY25) in review & outlook for FY26 

As we reflect on FY25, it is clear that the investment landscape was shaped by heightened geopolitical uncertainty, which translated into increased market volatility.

Early in the year, equities delivered strong returns. However, the third quarter’s tariff concerns rattled investor confidence, leading to sharp declines in both Australian and and US tax reforms, helped the year close on a more optimistic note. Nonetheless, volatility appears set to remain a defining feature moving into FY26.

Fixed income markets experienced similar turbulence. Yields climbed in the second quarter amid cautious signals from the US Federal Reserve, resulting in negative returns. A modest recovery in the third quarter, supported by rising sovereign bond prices in Australia and abroad, was interrupted by ongoing global trade tensions, underscoring the fragility of the environment.

Currency markets told a similarly complex story. Most currencies strengthened against the US Dollar, which endured its worst half-year performance since 1991—a stark reminder of the US Dollar’s recent volatility. The US Dollar fell by 5% against the Australian Dollar from 1 January to 30 June 2025.

On the macroeconomic front, many central banks around the world (including the US Federal Reserve, European Central Bank and Bank of England) eased their monetary policy. In Australia, interest rates declined from 4.35% to 3.85% as at 30 June 2025; yet retail sales remained sluggish despite a notable rise in employment.

Europe saw a significant policy shift, with Germany passing a bill to increase infrastructure spending by €500 billion—an unprecedented move for a traditionally conservative fiscal authority.

Meanwhile, geopolitical tensions escalated in the Middle East, culminating in military strikes between Israel, the US and Iran, before a ceasefire was established.

The US legislative landscape also saw notable activity. The “One Big Beautiful Bill Act,” which extends and expands tax cuts from the previous Administration, was passed through Congress, adding another layer of fiscal policy complexity.

The persistence of tariffs and trade tensions suggests that global supply chains and international trade will continue to face disruption. For Australia, this presents a nuanced picture. China, its largest export partner, is expected to deploy further stimulus measures aimed at boosting consumption and stabilising its property market, with the overall impact on growth potentially less severe than in other regions.

However, we anticipate that ongoing trade uncertainties could trigger a slowing in the growth of the US economy and potentially elsewhere. The US is likely to experience fiscal tightening, driven by import price inflation; whereas Europe’s growth prospects may benefit from increased government spending, particularly in Germany.

In Australia, with inflation now within the Reserve Bank’s target range, further rate cuts appear to be on the horizon, with the most recent being the cash rate target cut to 3.60% at the August monetary policy meeting. Yet, we expect domestic growth to remain subdued; constrained by higher interest rates, cost-of-living pressures and cautious business investment amid geopolitical uncertainties.

Equity valuations remain stretched, especially in the US, with low prospective risk premiums making active management challenging. We suggest maintaining strategic allocations that align with your clients’ risk appetite and long-term objectives, complemented by a disciplined approach to active management to capture alpha.

We believe your continual assessment of your clients’ objectives and risk tolerances, and employing scenario analysis, is key to portfolios remaining aligned with evolving needs and market conditions.

In addition, strong governance remains vital, especially during periods of heightened volatility. Effective oversight can enhance operational alpha, improve risk management and ensure disciplined rebalancing, helping to safeguard long-term outcomes.

We maintain an overweight stance on Australian government bonds; reflecting signs that cash rates may have peaked in this cycle, supported by ongoing global trade uncertainties. Our outlook on growth assets is more cautious; with tariffs likely to temper US economic momentum, and corporate earnings may be underappreciated as companies withdraw forward guidance. Consequently, we are adopting a more conservative stance, increasing cash holdings within diversified portfolios.

Within equities, we have a neutral view on Australian large cap equities. While unchallenging valuations and modest forward earnings leave a low bar for an upside surprise, we do not have sufficient conviction to overweight Australian equities given the subdued macro-outlook for Australia.

In currencies, we are underweight the US Dollar. While geopolitical tensions may temporarily boost safe-haven currencies, our longer-term view considers slowing global growth, high valuations and the potential fading of US exceptionalism; factors that could weaken the US Dollar further.

We will continue to monitor markets closely, adjusting our positioning as needed whilst seeking to optimise performance and manage risk. We remain committed to delivering you disciplined, strategic insights to support your clients’ long-term objectives.

Thank you for your continued trust in Mercer. We are here as a partner to your portfolio. Please do not hesitate to reach out to your Mercer representative with questions, or to discuss tailored strategies.