Inflation Tightrope
As 2025 draws to a close, diversified investors have enjoyed strong returns across multiple asset classes. Year-to-date, the ASX 200 has risen nearly 9%, global bonds have delivered gains of more than 5%, and global equities are up 21%.
This year has once again highlighted the value of maintaining broad exposure across asset classes and regions. Staying invested with regular contributions, despite short-term noise, is what drives long-term wealth creation.
Key Takeaways:
Despite the inherent unpredictability of financial markets, 2025 is shaping up to be another positive year for diversified investors.
The Reserve Bank of Australia continues to navigate the delicate balance between temporary and persistent inflation pressures.
Local equities pulled back, driven largely by stretched valuations in the banking and technology sectors.
Australian Government Bonds yields strengthened as expectations for additional rate cuts faded.
Australia Economy
The Reserve Bank of Australia kept interest rates on hold at 3.60% at its November policy meeting.
October monthly inflation jumped to 3.8%, while trimmed mean inflation had increased to 3.3%. This comes after the more comprehensive September quarter CPI jumped increased from 2.1% to 3.2%.
Keep in mind the central bank’s objective is for inflation between 2-3%.
Housing led the increase, with rents 3.8% higher and electricity jumping 33.9% as government rebates and subsidies rolled off. On a normalised basis, energy has increased 6.0% over the past 12 months.
Governor Michele Bullock has struck a patient tone, noting that the Board will need clearer signs of “persistent inflation” before taking action. While some inflationary pressures may prove temporary, the RBA is expected to wait for the December quarter CPI before considering any policy shift. Even so, the RBA has revised its own forecasts higher, now expecting underlying inflation to remain around 3.2% by mid-2026.
The Board also debated how much weight to place on the new monthly CPI figures and agreed that, given the series is still in its early stages, they should interpret it cautiously.
Wage growth posted a second straight quarterly rise, reaching 3.4%, with public sector pay increases once again outpacing those in the private sector. Notably, overall wage gains remain well above pre-pandemic norms. Meanwhile, the unemployment rate held steady at 4.4%.
Equities
The local benchmark fell 2.7% in November as investors pulled back from interest rate sensitive sectors. The big four banks—together making up nearly a quarter of the index—declined as markets reassessed the likelihood of further rate increases alongside already stretched valuations.
The technology sector also slumped, dropping 11.6%, reflecting fading enthusiasm for the artificial intelligence theme, particularly in the U.S.
Even so, the S&P/ASX 200 remains up 8.9% year-to-date and, barring any unexpected developments, is on track to deliver its fourth consecutive year of positive returns.
Globally, equity markets were largely flat, with the MSCI All Country Index edging up 0.1%. Gains in Japan and Europe were offset by declines in emerging markets.
Despite 81% of U.S. companies beating earnings expectations, the S&P 500 rose only 0.2%, underscoring the high bar set for corporate results and already high valuations.
Fixed Income
Similar to equities, global bond markets took a breather with the Bloomberg Global Aggregate Index unchanged for the month. In Australia, 10-year government bond yields rose 22 basis points to 4.52% as investors erased the possibility of near-term rate cuts. In contrast, US Treasury yields fell as markets began pricing in a potential December rate cut by the Federal Reserve.
Currencies
The Australian dollar was volatile through November but ultimately finished 0.1% higher against the US dollar. It weakened 0.5% versus both the Euro and the Pound. In contrast, the Australian dollar surged to a 52-week high against the Japanese yen.
Commodities
Gold jumped 5.2%, supported by expectations that the US Federal Reserve may deliver another rate cut in December. Iron ore slipped 1.4%, giving back some of its strong October gains. Both silver and copper climbed to record highs when priced in Australian dollars.
Oil prices declined again as OPEC+ confirmed another production increase scheduled for December. The prospect of a US brokered Russia-Ukraine peace framework, tabled during the month, added further downward pressure and suggests prices may remain subdued in the near term.
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