Monthly Newsletter A Rally on Borrowed Time.

Published on 27 May 2026

Geopolitical developments across the Middle East remained a central focus for investors and continued to drive elevated volatility across commodity and currency markets in April. Share markets around the world bounced strongly from the weakness seen in March on optimism of a de-escalation of tensions. The ASX200 increased 2.18% and international markets as measured by the MSCI World Index increased by 4.44%. The Strait of Hormuz blockade has and will remain the dominant driver across share, interest rate and currency markets because there is no clear endgame in sight. The buffer from global oil inventories is shrinking fast. Hence, crude oil prices are vulnerable to more upside.

Australian Markets.

The Australian share market return was positive however also uneven in April. The share market faded at month end, as domestic inflation and an increase in interest rates dampened sentiment. The NAB survey pointed to a worsening growth-inflation mix. Business conditions moderated to +3 from +6, a fourth consecutive decline that left the index firmly below its long-term average. Business confidence, the more forward-looking measure, rose 5 points to -24, but remains near its lowest level since 2020. The Westpac-Melbourne Institute consumer sentiment survey decreased -12.5% to 80.1. This was the largest monthly fall since the pandemic and suggests weaker economic growth over the remainder of 2026.

Australia's employment and retail sales growth moderated, while profits were unchanged. Forward orders continued to fall and capital expenditure recorded the sharpest decline of the post-COVID period. Capacity utilisation also fell, although it remains above its long-term average. Price measures, meanwhile, accelerated and are approaching the high recorded in 2022. Input prices rose sharply and far outpaced output prices, pointing to margin pressure that should feed through to profits. The survey reinforced the message of slower growth alongside rising price pressures. The RBA has increased monetary policy by 0.75% in response to inflation that was elevated even before the Middle East conflict. Analysts are expecting another two interest rate rises of approximately 0.50%. It will be interesting to see if this occurs as economic growth is slowing which should limit the RBA's ability to tighten further.

Capital Gains Tax Reform.

The proposed changes to capital gains tax (CGT) could trigger one of the most significant shifts in investor behaviour seen in decades. Treasurer Chalmers has framed the reforms as part of a broader effort to address intergenerational inequality. However the market consequences may extend far beyond taxation policy. The current tax system has a relatively favourable treatment of long-term capital gains with estimates of median-income earners paying an effective CGT rate of around 16%, while higher-income investors pay approximately 23.5% after discounts are applied.

Under the proposed framework, the effective CGT rates could rise above 33% for higher-income earners and could exceed 40% during periods of strong market performance. The implications are substantial: investors may increasingly favour income-generating assets including high dividend paying companies over companies that reinvest profits for future growth. High-growth stocks delivering strong pre-tax returns could see materially lower after-tax outcomes under the new tax regime. For investors to achieve the same post-tax returns as before, growth companies may need to trade at significantly lower valuations which could reduce demand for high-growth sectors, particularly technology and innovation-focused businesses that rely heavily on reinvestment and long-term capital appreciation. Whilst this will not happen overnight, the trend is likely to develop over the medium term (2 years).

United States.

The US economy recorded a 2% annualised growth rate in the first quarter of 2026 and is likely to see growth of around 2.6% in the second quarter with a large contribution from net trade, high-income household consumer spending and AI/technology-related investment. Despite the strong growth, consumer confidence is at or close to an all-time low. The employment data show that the jobs market has softened considerably, and real household disposable income is flatlining. The high petrol prices are likely to create more headwinds by eating into spending power. On the investment front, business capital spending outside of technology has contracted for six consecutive quarters. Hence, while the US continues to post decent economic growth, it is very concentrated.

Consumer price inflation in the US was higher than analysts expected. The headline inflation reading increased to 3.8% from 3.3%, while core increased to 2.8% from 2.6%. Energy led the increase, with little passthrough to core inflation so far. However, given the size of the energy shock, both are likely to rise further. Leading measures point to higher goods inflation ahead. Services inflation should remain contained in the near term, as the labour market is near equilibrium. Kevin Warsh is expected to be sworn in as Federal Reserve chair in the coming days, formally taking over from Jay Powell. Mr. Warsh does not believe in forward guidance, blaming it for compounding the inflation is "transitory" mistake of 2021 and 2022. As such, expect Mr. Warsh to downplay the importance of the summary of economic projections and dot plots, at least until he can convince a majority of the FOMC to move away from them. However, a break from the current communication framework will be challenging and likely cause more volatility. For now, I expect the Federal Reserve to remain on hold for the near term. That could change if inflation starts spreading and second-round effects emerge, or if growth weakens meaningfully and the labour market starts to flail.

China.

In China, consumer price inflation surprised to the upside led by higher energy prices while demand-sensitive components remain subdued, especially rents and food. Producer prices saw a very strong increase of 2.8% over the year, almost double consensus, once again driven by higher energy prices. China's GDP growth was 5.0% in the first quarter which was at the high end of the GDP growth target of 4.5–5.0%. Consumption grew by 2.4%, investment by 1.9% and net exports (exports minus imports) by 0.8%. The growth acceleration was driven by new productivity in the workforce, more fiscal spending and stronger exports. Anti-involution policy — an ambitious economic campaign by Beijing to eliminate destructive, cutthroat corporate price wars — seems to be working in the EV market where auto producer prices are rising for the first time since 2025. Much of this has been due to the oil shock.

Global Technology & AI.

The standout performers have once again been mega cap technology and semiconductor companies benefiting from the global artificial intelligence investment boom. Investors remain highly focused on hyperscalers and AI infrastructure leaders that are now beginning to demonstrate tangible returns from years of aggressive capital spending. Strong earnings momentum has also helped investors overlook concerns about elevated valuations and concentrated market leadership. A relatively small number of large technology companies continue to account for a disproportionate share of overall market gains, raising concerns about the sustainability and breadth of the rally. Semiconductor stocks, in particular, are trading at valuation multiples significantly above long-term historical averages, reflecting exceptionally strong investor optimism surrounding future AI-driven profit growth. NVIDIA (+13.55%), Amazon (+26%), Google (+30%) and Broadcom (+33%) all performed well. Lockheed Martin (-17%) was sold on the news of a potential ceasefire while Abbott Laboratories shares fell to a near decade low after management cut its 2026 profit forecast after completing the USD 21 billion Exact Sciences acquisition. Device and diagnostics franchises (FreeStyle Libre, Electrophysiology, Structural Heart) show strong profit growth, while Nutrition faces pressure and circa 1,700 infant-formula lawsuits with recent jury awards adding legal uncertainty.

In the Australian share market, materials and financial sectors were the primary contributors to market gains, with resources supported by a recovery in commodity prices and short covering after the March energy shock, while iron ore held around US$107 per tonne and gold came under pressure as elevated inflation expectations weighed on rate-cut pricing. The small-cap index outperformed large caps over the month, and the AUD recovered meaningfully against the USD, partly reflecting the hawkish domestic rate outlook, though this provided a headwind for those companies with profits earned offshore. Information Technology stocks and property trusts outperformed, benefiting from renewed enthusiasm for AI infrastructure spending and data centre investment. Info Tech (+12.3%) was the best-performing sector over the month, led by NEXTDC (+27.8%) and WiseTech Global (+12.3%) while HealthCare (-8.3%), dragged down by Cochlear (-44.4%) and CSL (-11.6%), underperformed the broader market. At a stock level, the best performers included NEXTDC (+27.8%), Mineral Resources (+18.8%) and Greatland Resources (+17.9%) while Cochlear (-44.4%), The A2 Milk Company (-26.0%) and CSL (-11.6%) were amongst the largest underperformers.

Portfolio Updates.

The Investment Committee maintain our reduced exposure in the STAR Tactical portfolio. This has been parked in cash awaiting deployment — patience is a virtue. Share market volatility has increased and more volatility is expected.

The Hyperion investment in the Accelerated International share portfolio returned 7.2% in April, outperforming its benchmark (MSCI World Accumulation Index (AUD)) by 2.7%. ARM Holdings PLC, Alphabet Inc. and Amazon.com, Inc. saw the strongest share price performance, while ServiceNow, Inc., Intuit Inc., and Spotify Technology SA saw the largest declines. April marked a strong rebound for the manager following a difficult start to the year. The portfolio remains exposed to companies most directly leveraged to the build-out of artificial intelligence (AI) infrastructure and applications. Many of these companies increased in April as investors digested resilient earnings, robust capital expenditure commitments and increasing evidence that AI-driven productivity gains are translating into tangible commercial outcomes.

The Insync portfolio performance continued to struggle on the rebound as a significant portion of the rally continues to be driven by the narrow group of AI-companies tied to accelerating enterprise and hyperscaler compute demand. The manager's diversified portfolio has led to some of the performance lag as the portfolio remained intentionally diversified across a broader range of structural growth themes and high-quality businesses outside the narrowest segments of the AI complex. We are satisfied that the manager has kept to its investment philosophy and expect performance to recover. Schneider Electric was the largest contributor to the Fund's return in April, whilst Nintendo was the largest detractor. Nintendo's Switch 2 broke records as the fastest-selling console in history in its opening months but the market was not satisfied with the outcome despite the company's meaningful pricing power relative to peers.

The Accelerated Australian share portfolio underperformed the broader ASX 200 index in April. The Australian share market continues to struggle under the weight of a higher oil price and higher interest rates. Consumer discretionary stocks like Nick Scali and JB HiFi in particular have borne the brunt of the interest rate rise at the time of writing in early May. Commodity prices however found support with oil, copper, aluminium and lithium in particular performing well.

Iluka was the best performing stock, rising 22.4%. The price of Zircon has been rising, and Iluka remains one of the lowest cost producers of the product. A lasting recovery in the zircon and rutile markets should see Iluka quickly turn around profitability. Macquarie Group finished the month 16.4% higher with its banking segment posting a result. Wisetech, Car Group and REA Group bounced from recent sell-off, rallying 12.36%, 11.27% and 8.59% respectively. The software and internet search segments have been battered in recent months due to the threat from AI-related disruption. The sector finally found some support from oversold levels, with the rally in the Nasdaq also helping sentiment towards the sector. The Woolworths share price fell 5.55% over the month dragging down relative performance. Despite a generally solid third quarter trading update, with food sales up circa 6% on last year, the company noted that there has been a shift in consumer trading patterns since the start of the Middle East war. That, combined with the threat of further interest rate rises impacting consumer spending, saw the shares retreat. The shares look a touch expensive, however, it remains one of our core holdings in the consumer sector, as it has genuine pricing power, and should remain a beneficiary if inflation continues. The rise in the AUD versus the USD (from 69c to 72c) saw US reporting stocks suffer with CSL, Resmed and Amcor down 11.6%, 7.4% and 5.2% respectively.

The world economy has found some calm in the eye of the energy storm. However it is far from safe harbour. The ongoing Strait of Hormuz blockade remains the dominant market driver because there is no clear endgame in sight while the buffer from global oil inventories is shrinking quickly. As a result, crude oil prices are edging higher, weighing on both global bond and equity markets. Five percent of the world's yearly oil supply has already been lost because the Strait of Hormuz is shut. Every day it remains closed the deficit grows by 14 million barrels. Since peace talks between America and Iran have stalled, a reopening still seems far away.

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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.