Market Overview

August was another constructive month for global equities, although the investment environment became more complicated as inflation and interest-rate expectations moved back to centre stage.

The technology sector recovered from some of July’s volatility as strong earnings from major technology companies helped restore confidence in the Artificial Intelligence investment cycle. Importantly, markets are increasingly demanding evidence that the enormous amounts being invested in AI can translate into higher revenue, margins and ultimately free cash flow.

The broader equity market also remained resilient. Corporate earnings have generally been stronger than expected and market participation has broadened beyond the handful of technology companies that dominated returns during the first half of the year.

However, bond markets are sending a more cautious message. Long-term government yields remain elevated as investors confront persistent inflation, increased government borrowing and substantial capital requirements associated with AI, energy infrastructure and defence spending.

The investment backdrop therefore remains positive, but increasingly selective: earnings matter, valuations matter, and the cost of capital matters.

Global Developments

United States – Inflation Returns to Centre Stage

Federal Reserve Chairman Kevin Warsh used his Jackson Hole address to make it clear that the fight against inflation is not over.

US inflation remains materially above the Federal Reserve’s 2% objective. The PCE price index is running at approximately 3.7% annually, while underlying inflationary pressure remains broad.

Markets responded by materially increasing expectations of another Federal Reserve rate rise. This represents an important change from the investment environment of recent years. Markets had become accustomed to expecting lower interest rates; instead, both the Federal Reserve and RBA are confronting inflation that has proven more persistent than originally forecast.

Higher rates for longer remain an important risk for highly leveraged companies, governments and households.

Artificial Intelligence – From Excitement to Economics

The AI investment cycle continues, but investors are asking a more important question: what return will companies generate on the enormous capital being invested?

The first half of 2026 was dominated by AI-related businesses, particularly semiconductors and infrastructure. July brought a sharp correction as investors questioned valuations and future returns, but August earnings provided further evidence that AI investment is beginning to translate into revenue and profit growth.

Microsoft, Amazon and Google provided greater evidence of AI monetisation, while demand for semiconductors, memory, data centres and energy infrastructure remains substantial.

The investment thesis remains intact, but the market is becoming more discriminating between businesses benefiting from AI and businesses simply carrying an AI valuation premium.

This is healthy. Strong investment themes rarely travel in a straight line, and valuation discipline remains essential.

Global Debt and Bond Markets

One area we continue to monitor closely is the long-term bond market.

Governments globally continue to issue substantial amounts of new debt to fund deficits, defence expenditure and infrastructure. At the same time, the private sector is competing for the same capital, particularly through the enormous investment required for AI, data centres and energy infrastructure.

This increasing demand for capital is placing upward pressure on long-term bond yields.

For investors, higher long-term yields create both risks and opportunities. Highly leveraged businesses and governments face higher financing costs, while investors can once again earn meaningful income from quality fixed-interest securities.

It is another reminder that the era of almost-free capital has passed.

Australian Economy

Inflation and Interest Rates

The Reserve Bank left the cash rate unchanged at 4.35% in August, following three increases earlier this year.

However, this should not be interpreted as the end of the tightening cycle.

The RBA acknowledged that inflation remains too high and monetary policy may need to tighten again should inflation risks materialise. Inflation is not expected to return to around the midpoint of the target range until late 2027.

• Headline CPI: 3.5%
• Trimmed mean inflation: 3.6%
• Fuel prices: +7.5% for the month
• New dwelling prices: +5.7% annually
• Rental inflation: 3.6%

The stronger numbers caused markets to increase expectations of another rate rise, while several major economists now expect another increase before year-end.

Our View

Inflation remains Australia’s most important near-term economic challenge.

Government expenditure, weak productivity, housing constraints and higher energy costs continue to add pressure to an economy with limited spare capacity.

The RBA can restrict demand through higher interest rates, but it cannot solve structural problems such as poor productivity, excessive regulation, inadequate housing supply or inefficient government spending.

A better balance between fiscal and monetary policy would reduce the burden being placed on households and businesses through interest rates.

Productivity – Australia’s Long-Term Challenge

The Reserve Bank again highlighted Australia’s historically weak productivity growth, noting that it is constraining the economy’s potential growth rate.

This matters because productivity ultimately determines how quickly wages and living standards can sustainably rise.

Increasing government expenditure or population can increase headline GDP, but neither necessarily improves the economic position of the individual Australian.

Long-term prosperity requires businesses and workers to produce more value per hour worked.

• stronger private-sector investment;
• reliable and internationally competitive energy;
• simpler regulation and less red and green tape;
• infrastructure that improves economic efficiency;
• incentives for innovation and entrepreneurship; and
• disciplined government expenditure.

Without productivity growth, Australia risks attempting to improve living standards simply by redistributing a slowly growing economic pie rather than making the pie larger.

Political Landscape – Voter Discontent

Australian politics also showed signs of increasing voter dissatisfaction during August.

In Western Australia, One Nation candidate Luke Herdegen won the Secret Harbour by-election, following a 22% swing against Labor in an area traditionally considered very safe Labor territory. Labor had secured more than 83% of the two-party-preferred vote in the area just over five years ago.

The result has raised the prospect of a new One Nation heartland developing across Perth’s southern suburbs. This potentially puts pressure on traditionally safe Labor electorates while also complicating the political landscape for Liberal MPs, including Andrew Hastie.

One by-election should not be viewed as establishing a national trend. However, the magnitude of the swing is noteworthy and suggests increasing voter frustration.

For investors, the relevance is not the political result itself but the economic issues helping drive voter sentiment. Cost-of-living pressures, housing affordability, inflation, taxation and concerns about economic management are increasingly influencing the political landscape.

Private Credit – Liquidity Matters

Developments in Australia’s private credit market during August provide another reminder that yield and liquidity are not the same thing.

The collapse of property developer Bathla Group, carrying more than $3 billion of debt, resulted in several private credit managers restricting or suspending investor withdrawals.

CVS Lane temporarily suspended redemptions across funds with significant Bathla exposure, while other managers introduced liquidity restrictions even where they had no direct Bathla exposure.

This does not mean private credit itself is inherently unsuitable. It demonstrates the importance of:

• manager selection;
• diversification;
• security quality;
• borrower concentration; and
• matching investor liquidity expectations with the underlying assets.

Our preference remains for well-diversified credit strategies with transparent portfolios, appropriate liquidity and experienced institutional investment management.

Outlook

The investment outlook remains constructive, although the range of potential outcomes has widened.

Company earnings remain broadly supportive, the AI capital-investment cycle continues and global economic activity has remained more resilient than expected.

Against this, investors must contend with:

• inflation remaining above central-bank targets;
• potentially higher interest rates in both Australia and the United States;
• rising government debt and long-term bond yields;
• geopolitical and energy-market risks;
• elevated valuations in selected equity markets; and
• increasing differences between good and poor businesses.

Our portfolio focus therefore remains on:

• maintaining global diversification, rather than relying heavily on the Australian economy;
• investing across different investment styles and sources of return;
• maintaining exposure to structural growth opportunities including AI, infrastructure and productivity-enhancing technologies;
• favouring quality companies with strong balance sheets, sustainable cash flow and pricing power;
• using high-quality fixed income and credit to provide income and portfolio diversification; and
• maintaining sufficient liquidity and defensive assets appropriate to each client’s circumstances.

Periods of volatility should be expected. They also create opportunities for disciplined long-term investors.