Investment & Economic Review July 2026
The June quarter of 2026 will be remembered as a tale of two markets. It opened under the shadow of the Persian Gulf conflict and the closure of the Strait of Hormuz, and closed with a de-escalation that few dared hope for in April. Diplomatic progress accelerated through May and June, culminating in a memorandum of understanding under which Iran agreed to reopen the strait in exchange for a staged lifting of the blockade of its ports. Tanker traffic is again flowing through the world’s most important energy chokepoint, and the ‘war premium’ that had gripped commodity markets has substantially deflated.
The oil price tells the story best. Having surged more than 50% after the February attacks to trade well above US$100 per barrel, Brent crude retreated to about US$72 by late June – only some 7% above its pre-war level. The peace remains fragile – sporadic attacks on shipping and disagreements over implementation of the agreement are a reminder that this is a live and changeable situation – but the worst-case stagflation scenario we cautioned about in April has, for now, been averted.
Last quarter we encouraged investors to remain patient, to focus on fundamentals and longer-term objectives, and to begin deploying cash as value emerged. That advice was rewarded more quickly than we anticipated. Markets that had priced in a prolonged energy crisis snapped back with remarkable speed once the geopolitical clouds began to lift – a useful reminder that reacting to the news of the day is rarely a profitable investment strategy.
In the United States, the rebound was extraordinary. The S&P 500 gained about 14% for the quarter and the technology-heavy Nasdaq about 20% – for both, the best quarterly performance since the pandemic rebound of 2020. The artificial intelligence ‘scare trade’ of the March quarter reversed just as violently as it arrived. Semiconductor stocks recorded their strongest quarter on record, and by June the advance had broadened beyond the mega-caps to smaller companies and value stocks alike. The renewed exuberance is, however, once again straining valuations, and it comes just as the Federal Reserve has turned distinctly hawkish. Markets are now debating whether the next move in US interest rates is up rather than down, all ahead of a noisy mid-term election season in November.
At home, the May Federal Budget was framed squarely at cost-of-living relief. The Treasurer announced an underlying deficit of $31.5 billion (about 1% of GDP) alongside a cut in the lowest marginal tax rate from 16% to 15% from 1 July, a new $1,000 instant tax deduction, and a temporary halving of the fuel excise from 1 April. These measures will ease pressure on stretched household budgets, but the additional stimulus sits somewhat awkwardly alongside a Reserve Bank that is still trying to restrain inflation, and bond investors took note.
Consumer confidence, which had collapsed to decade lows as petrol prices spiked in March, has begun to recover as fuel costs retreat and the budget measures approach. The improvement is tentative – households remain under pressure from higher mortgage rates and still-elevated living costs, and the pragmatic ‘trading down’ behaviours we described last quarter appear to have stabilised spending rather than revived it. Elsewhere, China’s advanced manufacturing and electric vehicle export engine has regained momentum as global shipping routes normalise, while Europe enjoyed welcome relief on the energy front even as its structural growth challenges persist.
Australian Shares
The Australian stock market, as measured by the S&P/ASX 200, recovered from its difficult start to the year, gaining approximately 3.5% for the June quarter to close at 8,778 points. The index rallied to just over 9,000 points in mid-April as the worst geopolitical fears receded, and thereafter traded in a broad band between roughly 8,500 and 9,000 – a consolidation that, in our view, reflects a market weighing improving global sentiment against a domestic interest rate cycle that is still working against it.
With the financial year now closed, the full-year scorecard makes interesting reading. The ASX 200 finished FY2026 up about 3% in price terms, or roughly 6.3% including dividends. That is a respectable outcome for a year that contained a war, an energy crisis and three interest rate increases, but it lags well behind global peers. The Nasdaq 100 gained more than 30%, the UK market almost 20% and the Japanese market 75% over the same period. Much of the gap is explained by what our market lacks – the large artificial intelligence and technology names that powered offshore indices.
The divergence within the market was even more striking than the headline number. Materials was the standout sector, up more than 52% for the financial year as miners benefited from elevated commodity prices, followed by energy (+14.5%) and consumer staples (+13.7%). At the other end, healthcare (-36.1%) and information technology (-37%) endured dreadful years. Individual examples illustrate the spread: Mineral Resources nearly tripled, and BHP and Rio Tinto each gained more than 60%, while former market darlings CSL, Cochlear, WiseTech and Xero all lost between half and two-thirds of their value. We have rarely seen a year in which stock and sector selection mattered so much, nor one that better demonstrated the danger of paying too much for popular growth stories.
Commodity markets were again volatile. Iron ore remained resilient, holding above US$100 a tonne and continuing to underpin national income and government revenues. Oil, as noted, completed a remarkable round trip. Gold was the quarter’s other big story, having peaked at a record of about US$5,589 an ounce in late January. Amid the flight to safety, it has since fallen roughly 25% to about US$4,165 as the war premium unwound – a timely reminder that even ‘safe haven’ assets carry price risk. A late-quarter slide in industrial commodity prices, triggered by a hawkish US Federal Reserve and a stronger US dollar, bears watching.
Most companies will report their full-year results in August, and we expect the commentary to focus on input costs and margins rather than revenues. Dividend payments have largely been maintained, and the market’s average dividend yield remains about 3.5%. Share buybacks, often debt-funded, remain a favoured capital management tool – a practice we continue to view with some reservation given it leaves balance sheets more exposed should conditions deteriorate.
With the RBA on hold but retaining a tightening bias, we expect the market to remain range-bound and news-driven in the near term. Investors who deployed cash into the autumn weakness have been rewarded; the task now is patience rather than pursuit. Chasing the market higher after the recent rally offers less compelling risk/reward than the entry points of three months ago, and we would reserve fresh buying for the volatility that reporting season habitually serves up.
International Shares
In the March 2026 quarter, the MSCI world stock market index lost its footing and fell by 3.9%,Global share markets staged a powerful recovery in the June quarter. The MSCI World index gained approximately 13%, recouping the March quarter’s losses and more, led emphatically by the United States where the S&P 500 rose about 14% and the Nasdaq about 21% – their best quarters since 2020. What began as a relief rally in the large technology companies broadened appreciably. By June, small-cap, equal-weight and value benchmarks were also setting new records, a healthier foundation than the narrow leadership that characterised 2025.
The speed of the reversal in sentiment toward the technology sector was remarkable. The ‘scare trade’ that punished the AI complex in the March quarter gave way to renewed enthusiasm as earnings continued to deliver. Consensus now expects June-quarter earnings for the S&P 500 to grow more than 20% year-on-year, with revenue forecasts also upgraded through the quarter. The rotation into ‘HALO’ stocks (heavy assets, low obsolescence) that we described in April has partially unwound, though the energy and materials names that benefited have retained much of their gains.
Asian markets rebounded in sympathy. The energy-importing economies of North Asia, which were hit hardest by the oil spike, recovered strongly as crude retreated. Japan’s Nikkei finished the financial year up 75% and the semiconductor-heavy Taiwanese market bounced sharply. China’s carefully guarded export boom in electric vehicles and industrial technology continues, assisted by the normalisation of global shipping routes.
European shares recovered more modestly. Germany’s DAX (+5.6% for the financial year) and France’s CAC (+9.7%) reflect economies still burdened by tepid growth, while the UK’s FTSE 100 was among the better major-market performers (+19.5% for the year), aided by its heavy weighting to energy and resources. European bond yields have eased alongside the retreat in oil, giving central banks there some welcome breathing room.
For Australian investors, currency was a swing factor. The Australian dollar reached a 2026 high above US$0.72 in May before falling back to about US$0.69 as the US dollar strengthened on hawkish Federal Reserve rhetoric – a move that flattered unhedged international returns late in the quarter. Looking forward, the principal market risk has rotated from geopolitics back to monetary policy. If the Federal Reserve does resume raising rates, richly priced growth stocks would again be vulnerable. Having advocated adding to international exposure amid the March-April weakness, we would not chase the rally aggressively at current levels.
Property Securities
After being walloped in the March quarter, the listed property sector spent the June quarter stabilising rather than rebounding. The S&P/ASX 200 A-REIT index ended the quarter at about 1,695 points, a gain of approximately 12.5% – clawing back only a fraction of the March quarter’s 17% fall and lagging the broader market’s recovery.
The sector’s fundamentals did not deserve last quarter’s drubbing, and the retreat in the ten-year bond yield from above 5.1% to about 4.7% should have been supportive. The problem was competition for capital: with risk appetite surging back toward growth and technology, income-style sectors were left behind, and end-of-financial-year portfolio reshuffling brought renewed selling late in June, with Stockland, Dexus and GPT all falling sharply in the final week.
For income-oriented investors, the value case we outlined in April remains intact. Most trusts continue to trade at meaningful discounts to their underlying net asset values – in some cases (Dexus, for example) by more than 20% – and distribution yields of about 5% are available from quality diversified names such as GPT Group, Scentre Group and Mirvac. Goodman Group, at about $30, remains well below its early-2025 highs and continues to represent better value for growth-oriented property investors than it has for some years.
We continue to regard REITs as among the better value propositions in the market. A relatively lower-risk physical asset class offering excellent income yield and improved entry-point merit, with the important caveat that the sector will remain acutely sensitive to any renewed rise in bond yields.
Interest Rates
The Reserve Bank delivered a third consecutive increase in May, lifting the official cash rate by 0.25% to 4.35% (on an 8-1 Board vote), before pausing at its June meeting. The June statement and subsequent minutes signalled that policy settings are now judged sufficiently restrictive to give the Board scope to pause and monitor developments, while retaining a clear tightening bias.
In its June minutes, the Board agreed that interest rates should remain restrictive in order to curb excess demand and return inflation to target, even as economic growth slows. In plainer language, the RBA believes it has done enough for now, but it is not yet contemplating cuts.
The inflation picture explains the caution. Headline inflation is running at about 4.0% and the trimmed mean at 3.6%, both well above the 2-3% target band, and the RBA expects headline inflation to have peaked at around 4.8% mid-year. Falling fuel prices are now doing some of the Bank’s work for it, which is why the futures market has scaled back its expectations to a peak cash rate of about 4.50%, and why three of the four major banks now expect the RBA to remain on hold before eventually easing in 2027.
Long bond yields have retraced meaningfully. After briefly breaching 5.1% in March – the highest in more than a decade – the Australian ten-year yield has settled back to about 4.7% as the energy shock unwound. Corporate fixed interest spreads have also narrowed as risk appetite returned, so the 6%-plus yields briefly on offer from quality corporate securities have become scarcer, and the extra risk required to obtain them is rising.
Our guidance is unchanged: term deposits, big-bank securities and government bonds continue to offer decent yields with minimal risk, and investors do not need to (and should not) take unreasonable risks to generate satisfactory income from this asset class. As ever, when an interest rate on offer seems too good to be true, it probably is.
Outlook
Three months ago, we wrote that markets were mostly priced more appropriately and that investors with a reasonable time horizon should begin deploying cash. The speed of the subsequent recovery has validated that approach – but it also means the easy gains have been made. Shares, particularly in the United States, are once again priced for good news, and the geopolitical calm underpinning the rally is barely a month old. Indeed, recent escalation in the Middle East is keeping the peace process tenuous and markets watchful.
We therefore counsel a cautiously constructive stance - remain invested, but be selective. Property trusts and some quality industrials still offer reasonable value, while much of the technology complex again looks expensive. Interest-bearing investments remain an easy and adequate option, particularly bank deposits and securities and government bonds. We would hold a modest cash reserve for the opportunities that volatility will inevitably present: reporting season in August, a fragile Middle East settlement, a hawkish Federal Reserve and US mid-term elections all provide plausible catalysts – rather than in expectation of calamity.
It has been a sobering but ultimately instructive first half of the year. Those who held their nerve, focused on fundamentals and used weakness to buy have been well served. We see no reason to change that playbook.
Yours sincerely,
Malcolm Palmer
Joseph Palmer & Sons
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