Monthly Newsletter A Fickle Truce.

The continued twists and turns in US / Iran peace negotiations, shifting narratives about AI and semiconductor prospects and the forecasts that US interest rates, which were forecast to rise, may not be lifted, caused volatility again in June 2026. The Australian share market as represented by the S&P/ASX 300 Accumulation Index returned 0.60% in June to be 4.14% higher over the quarter. In the United States, the Dow Jones Industrial Average reached a record high before easing modestly, finishing the quarter up 13%. The S&P 500 gained almost 15%, while the NASDAQ surged approximately 21%, marking the strongest quarterly returns for both indices since 2020. Despite these gains, the S&P 500 and NASDAQ remained below the record levels reached in early June. The strong rebound contrasted sharply with the first quarter of 2026, when major US share market indices recorded their largest quarterly declines in almost four years thanks to the rising oil price. The price of oil has come down materially from its circa USD 120 high point thanks to the signing of a memorandum of understanding between the US and Iran. Although it was a truce, it was a fickle truce nonetheless.

United States: Resilience & Fading Rate Hikes

The US economy remained resilient despite slowdown fears tied to geopolitical tensions. US economic data has surprised positively since the start of the year. The war with Iran has weighed on business and consumer confidence, however despite the low confidence, has had little impact on the actual economic outcomes. Real consumer spending weakened briefly, however is now re-accelerating and company investment growth has remained firm, driven by AI investment. It was interesting to see that U.S. jobs growth fell short of economists’ expectations, after gains exceeded consensus forecasts in the preceding three months. The weaker employment report saw analysts revise away their forecasts for higher interest rates. US inflation expectations have declined rapidly with oil prices. Expectations had been for inflation to reach 3.4%, however, the fall in the price of petrol will likely deliver a series of negative headline readings as we move into the third quarter of 2026. Core CPI will reflect slow housing inflation and declining motor vehicle insurance reinforcing less of a need to increase interest rates. The Federal Reserve kept interest rates unchanged at its June meeting, although the first meeting chaired by Kevin Warsh was more hawkish than investors had expected.

Australia: The RBA Holds, but the Bias Stays Tight

In Australia the RBA kept the cash rate unchanged at 4.35% in June. However, the Board, leaned against the idea that the hiking cycle is over. The RBA said that inflation remains “too high” and warned of “signs that some firms experiencing cost pressures, are increasing the prices of their goods and services and others are looking to do so”. We see the bias of policy will be to the tighter side, although, from the current level, the RBA may have a bit more time on its side before moving next. Headline inflation eased to 4.0% over the year to May, from 4.2% in April. Fuel prices helped headline inflation, with an 11.9% fall in the month subtracting 0.4% from the monthly inflation reading. Measures of inflation that exclude fuel remained firm including rental increases. Tight rental markets and low vacancy rates continue to support firm rent increases in the near term. Labour market data showed unemployment moving to 4.4% with an underlying weakening trend. Finally, household pressure continued to show strain, with the Westpac consumer sentiment survey weakening, the NAB business conditions easing, CoreLogic dwelling values stalling nationally in May after Sydney and Melbourne recorded outright declines, auction clearance rates tracking below average, and building approvals falling for a third consecutive month.

Europe: Above Target, but Too Fragile to Tighten

In Europe, inflation also remained above target and energy continued to be the main source of pressure. The European Central Bank had already lifted rates in response to the acceleration in headline inflation, however growth conditions remain weak and wage growth has not yet shown the sort of second-round effects that would justify a more aggressive tightening cycle. The policy challenge in Europe is therefore similar to Australia and the United States: inflation is too high, but growth is too fragile for central banks to move too far too quickly.

China: A Two-Speed Economy

In China, economic momentum softened slightly through Q2, prompting institutions like the IMF to project full-year 2026 growth at 4.6%, while the World Bank held its forecast steady at 4.4%. The tech-focused new economy continues to perform solidly with high-tech manufacturing growing 13.1% year-on-year since the start of 2026 while hi-tech fixed asset investment has grown 4.5% over the same period. In contrast, the old economy remains soft. Overall, fixed asset investment fell -4.1% year to date, real estate investment is down -16.2% and infrastructure investment is up just 0.6%. Producer price inflation recorded 4.1% from 3.9%, however, the June data snapped a 10-month streak of stable or upward price momentum, dropping -0.3% over the month.

It suggests we may have seen the peak in the price producers pay for their inputs. The primary drivers continued to be coal (20.6%), crude oil and natural gas (16.8%) and non-ferrous metals mining (25.5%) with many other categories, such as wine, beverages, and refined tea manufacturing (-5.3%), pharmaceutical manufacturing (-4.5%) and auto manufacturing (-2.1%) remaining in the deflation zone. This data shows that there's still work to do when it comes to restoring healthy price dynamics. Foreign trade serves as the economy's primary engine. Driven by booming global artificial intelligence infrastructure spending and clean energy manufacturing, goods trade surged over 15% in early 2026. This massive export outperformance has further widened China's current account surplus. This is unsustainable given the record high level of the trade surplus, hence the need for material stimulus for the domestic economy.

Eurozone: Leading Indicators Point Lower

Leading indicators suggest inflation pressures across the eurozone are continuing to ease. The recent rise in inflation was largely driven by higher energy prices, which appear to have peaked following the US-Iran ceasefire. While growth momentum has improved modestly, it remains insufficient to generate significant demand-driven inflation. Analysts expect broadly flat economic activity in the months ahead. Although the composite PMI improved in June, it remains below the expansion threshold. Meanwhile, long-term survey-based inflation expectations rose during the Iran crisis, but higher-frequency market-based measures have since returned to levels consistent with the ECB’s inflation target.

Japan: Bond Yields at 30-Year Highs

The benchmark 10-year JGB yield surged from 2.1% in March to a 30-year high of 2.90%. This rapid escalation stems from market concern over an unanchored expansionary budget. The government's removal of "fiscal health" commitments from its draft economic blueprint triggered a sharp sell-off in the long end of the curve. In July, yields abruptly fell 20 basis points to 2.70% after the government stated it would encourage domestic public pension funds to step in and absorb domestic financial assets to cap escalating yields.

Markets: AI & the Global Profit Cycle

Around the globe, artificial intelligence (AI) remains the dominant market theme, although its influence continues to evolve and broaden across new subsectors, accompanied by changing assessments of the potential beneficiaries and adversely affected industries. Capital-raising activity among large technology companies has accelerated and recently expanded beyond debt issuance to include equity, with Alphabet representing a notable example.

The global corporate profit cycle remains robust and supportive of financial markets. Over the past three months, global profit growth expectations for 2026 and 2027 have increased by 4.8% and 4.9%, respectively. This represents one of the strongest periods of profit growth outside a post-recession, V-shaped economic recovery. The breadth of earnings revisions across sectors and regions has also improved, although most sectors continue to lag Technology Hardware and Semiconductors. Indeed, Technology was the only sector in June to record upgrades exceeding those of the broader market. Energy-sector profit momentum has weakened following the recent reversal in the oil price, after recording strong upgrades earlier in the quarter. In other areas, companies that benefit more when the economy is growing, such as banks and industrial businesses, are still seeing improved profit expectations. However, consumer-focused businesses and more stable sectors like health care and everyday consumer goods are seeing little improvement or weaker profit expectations.

Australian Share Market Performance

The Australian share market delivered a positive return over the June quarter, although the headline result concealed a pronounced rotation beneath the surface. Commodity markets were the principal source of divergence. Crude oil prices weighed materially on Australian energy company share prices in June. Gold, which had been a leading market performer over the preceding year, also corrected as rising global bond yields and a stronger US dollar placed downward pressure on the bullion price. Iron ore remained resilient through April and May before weakening in June as softer Chinese demand and elevated port inventories constrained further gains. Consequently, the resources sector detracted from overall market performance in the month. By contrast, consumer discretionary stocks outperformed as investors increasingly anticipated a pause in the interest rate tightening cycle following softer inflation and labour market data. The AI theme also remained prominent in Australia, with capital goods companies and selected small-cap technology stocks outperforming as investors sought domestic exposure to global data-centre investment and infrastructure-related capital expenditure.

The Investment Committee took the opportunity to increase Australian Shares via VAS in the Tactical portfolio following market weakness. In the Strategic portfolios, the Investment Committee rebalanced portfolio exposures by reducing international shares (VEU) and increasing Australian Small Companies (SMLL) and Global listed property (DJRE). For those clients invested in the Dynamic Prosperity Portfolios, the exposure to ROBO was reduced and diversified to include an exposure to gaming, defence spending and the NASDAQ index.

STAR Portfolio Highlights

In the Accelerated Returns Australian shares portfolio, the investment manager, Joseph Palmer and Sons, performed about the same as the market it is measured against over the year. The manager bought more shares in ResMed after its share price fell sharply, from more than $45 to about $26 in June. ResMed’s management said it still expects the company’s sales to grow by around 10% each year through to 2030. The weaker US dollar has made some investors less confident because ResMed reports its profits in US dollars. Even so, the shares appear reasonably priced if the company achieves its expected growth. Woolworths also performed well, with its share price rising 13.62% over the month. Everyday consumer companies generally did well, with Wesfarmers also delivering a strong result, rising 13.3%. Because Woolworths had risen strongly, the manager sold part of the portfolio’s Woolworths holding to reduce the amount invested in that company. Woolworths reported higher labour and fuel costs, which are putting pressure on its profits. CSL was the strongest performer in the portfolio, rising 18.77%. Iluka’s share price fell 10.51% in June as mining and materials companies came under pressure. WiseTech also fell 8.36% to $33, while its founder, Richard White, again faced public attention over his management style and personal conduct.

Within the STAR Accelerated International shares portfolio Insync underperformed the broader market index over the quarter and year. Safran, the world's second largest aircraft equipment manufacturer, which supplies key systems including landing gear, wheels, brakes and wiring, was the largest contributor to manager’s performance returns during June. The share price benefit from improving sentiment across the aerospace sector as geopolitical concerns eased and oil prices declined. Indra Sistemas Spanish information technology, transport technology and defence company was the largest detractor in June. The improving sentiment surrounding the Iran–U.S. conflict prompted a rotation away from defence-related companies.

The performance of the Hyperion Global Growth Companies Fund bounced in the June quarter having been caught up in the software company sell-off over the past 6-9 months. Axon Enterprise Inc, Dutch Bros, Inc., and ASML Holding saw the strongest share price performance, while Palantir Technologies Inc., ServiceNow, Inc., and Microsoft Corporation saw the largest declines. The manager returned 18.1% (net of fees) representing an outperformance of the benchmark by 5.5%. As mentioned above, AI remained the predominant market theme throughout the quarter, with no sign of a slackening in compute demand and continued robust investment spending dynamics. In June, the manager participated in the Space Exploration Technologies Corp. (SpaceX) IPO and has continued to build the position since listing. Taiwan Semiconductor Manufacturing Company (TSMC) was also added to the portfolio.

It is pleasing to see that QUAL performed broadly in line with the benchmark over the quarter and has broadly kept pace with the index over the year. This is because the rise in the global share market has been so narrow around AI companies whereas the QUAL portfolio is well diversified. Longer term performance has been acceptable, given the increased volatility that we have seen and the massive threat of disruption by AI. The investment in QUAL, provides access to high quality companies based on key fundamentals including high return on money invested in the business, profit stability and low financial leverage. The portfolio benefit from holdings in Alphabet – parent of Google and ASML – a lithography company.

Fixed Interest

The fixed interest markets were stronger in the June quarter. Both the Realm High Income fund and Janus Henderson funds achieved a satisfactory return in light of higher inflation readings both in Australia and much of the rest of the world. Contributions to the performance over the June quarter were broad but led by mortgages and car loans and the interest rate sensitivity of the portfolio. In the Realm fund, the manager’s strategy was to let the portfolio’s interest rate maturity fall slightly whilst the portfolio credit rating remained unchanged. The Janus Henderson Diversified Credit Fund produced a return of 2.06% over the quarter to be 6.14% higher over the year. Australian and global bond yields remain volatile. The Fund has largely avoided the negative impact of rising interest rates and is actively managing a modest 0.6 - 0.9 year interest rate sensitivity as yields rise and fall. This limits capital losses but will also limit large gains if interest rates fall. The manager currently favours Australian interest rate levels over US and look to add to the maturity of the overall portfolio when government bond yields are available near 5%. This translates to Australian investment grade credit yields offering between 6% - 7% via the additional credit spread. This may include Sydney Airport and Westfield operator Scentre Group bonds.

Outlook

Easing oil prices and hopes of de-escalation in the Middle East materially improved sentiment over the month, although inflation remains too high for central banks to declare victory. The broader economic backdrop is mixed. On the positive side, labour markets have proven resilient and the manufacturing cycle continues to improve. Offsetting this, the Middle Eastern conflict has weighed on the outlook for growth, inflation and interest rates once again. For investors, the combination of resilient equity markets, elevated inflation and ongoing geopolitical risk suggests that volatility is likely to remain a feature of markets through the remainder of 2026.

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General Advice Warning

The information contained in this report has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. Investment markets past performance are not necessarily indicative of future performance. Whilst Financial Advice Co Pty Ltd is of the view the contents of this report are based on information which is believed to be reliable, its accuracy and completeness are not guaranteed, and no warranty of accuracy or reliability is given or implied and no responsibility for any loss or damage arising in any way for any representation, act or omission is accepted by Financial Advice Co Pty Ltd.