Australian investors face a complex landscape as they head into 2026, following a year marked by global economic shifts and domestic monetary policy adjustments. The S&P/ASX 200 is on track to close the year with a modest 4.5 per cent return, trailing the robust performance of the US market, buoyed by enthusiasm surrounding artificial intelligence. Looking ahead, Morgan Stanley projects a brighter outlook for the ASX, setting an end-of-2026 target roughly 10 per cent above current levels, which would represent the best performance for the local index since 2021.
Meanwhile, the rates market presents a less certain picture. The Reserve Bank of Australia (RBA) delivered three rate cuts in 2025, however, recent communications suggest a cautious approach amid global uncertainties. Money markets anticipate the next rate cut in the latter half of the year, while some economists are bracing for a potential rate hike following a surprise inflation increase. Despite these concerns, economic indicators from UBS reveal positive economic surprises, hinting at easing pressures on consumers as the effects of the year’s rate cuts take hold.
Global factors also weigh heavily on the outlook. The potential for new tariffs from the United States, particularly with the possibility of a second Trump term, looms large, keeping the Economic Policy Uncertainty Index elevated. Additionally, China’s economic struggles, including a deflating housing market, pose a risk. Recent disputes between China and BHP, an Australian iron ore miner, highlight the challenges in the crucial trading relationship. Iron ore prices are forecast to drop below $US100 per tonne in 2026 due to weak Chinese demand and increased supply from projects like Rio Tinto’s Simandou.
