Navigating Without a Compass Amid Economic Crosswinds.

The Australian and global share markets increased by 0.39% and 3.32% respectively in October supported by a strong US corporate profit reporting season and a Japanese stock market rally. This was despite the continued US government shutdown - now the longest in US history. The Australian bond market performed in line with the cash rate and international bonds increased on the back of better inflation data (outside the US) whilst emerging market shares increased by 5.47% over the month.

United States: AI and Corporate Earnings

In the US, two-thirds of S&P 500 companies reported quarterly profit results during the month, with upgrades to calendar year 2025 particularly in the Financials and Technology sectors. The AI boom continues to support investment spending. Based on analyst estimates and technology companies’ own announced plans, AI-related investment spending should continue to increase well into 2026, however the impact on GDP may be low as a significant portion of technology equipment is imported and imports detract from GDP. Outside of the AI sphere, the outlook for business investment is lacklustre. Although capital expenditure intention surveys have improved since the Liberation Day chaos, both manufacturing and non-manufacturing firms remain fairly pessimistic about their investment plans. Spending on manufacturing facilities declined through to July, the last month of available data before the government shutdown. The Federal Reserve board reduced the official interest rate, however tempered market expectations for a further cut in December. It also brought to an end quantitative tightening, suggesting easier liquidity conditions into 2026. Trade tensions between the US and China have simmered, with positive announcements winding back the previous escalation of trade barriers on both sides.

China: US–China Truce and Policy Outlook

Despite the positive developments on trade with the US, the Chinese share market weakened over the month. China’s third-quarter GDP growth was stronger than expected as exports and manufacturing continue to drive growth. The recent meeting between US President Trump and Chinese President Xi Jinping marked a major milestone in what has been a period of friction for US-China ties. The meeting concluded on a positive note, setting up a year-long truce. In terms of the immediate implications, the successful meeting defuses the immediate prospects of another sharp cycle of tariff and non-tariff escalations and the potential economic and market fallout. A case for further stimulus exists however the immediate implications of stronger third-quarter data and the truce with the US on policy could be a reduced urgency for stimulus to secure this year’s growth target, resulting in an increasing possibility for further stimulus to be pushed into next year. China’s property prices continue to fall, which threatens the transition towards consumption-driven growth.

Japan: New Leadership Sparks Market Rally

In Japan, the Liberal Democratic Party’s election of Japan’s first female prime minister, Sanae Takaichi, whose economic priorities include large-scale fiscal spending reform, a bias for loose monetary policy and strengthening the US-Japan alliance saw the share market react positively in October. Investors anticipate solid fiscal expansion and continued monetary easing. Her pro-growth stance sparked a record surge in Japanese share prices, rising bond yields that reflected heavy government borrowing to finance the stimulus and a yen depreciation.

Australia: Inflation and Labour Market Surprise

In Australia, a stronger-than-anticipated inflation report saw market expectations of a further RBA rate cut in 2025 vanish. The trimmed mean inflation recorded a rise of +1.0% over the quarter to be +3.0% higher over the year. This was well above the RBA’s target and mid-point estimate. Price increases were broad-based suggesting increasing inflationary pressures. Financial market pricing now shows only around an 11% chance of a December rate cut. Also surprising was the labour market report, which showed unemployment jumping to 4.5% from 4.3%. We have been forecasting an economy that is likely to experience some stagflation in 2026 and the latest data reinforces this view. House prices continue to rise, in October alongside a 12% increase in building approvals. Consistent with broader household consumption, the NAB Business Survey showed business confidence rose back above its long-run average.

Investment Committee Outlook

As we wrote in the quarterly report last month, the investment committee understands that the share price increases we have witnessed in Australia and the US, moved valuations above fair value in the short term. Whilst it was recognised that the AI investment theme, which has lifted share prices (particularly in the US), will continue for many years, the level of capital expenditure (money spent by businesses to make future profit) has been large. Profits need to rise to justify the return on the capital expenditure. If not the return on shareholder funds will drop and so could the share price. This heightened risk has prompted our reduced exposure in the STAR Tactical portfolio. Share market volatility has increased and more volatility is expected. At the time of writing this update, the US and Australian share markets were indeed experiencing weaker prices.

Gold: Taking Profit on Strength

Gold performed well again in October as the appetite by investors seems insatiable. The investment increased 4.4% over the month. The Committee rebalanced Gold down marginally as we believe it to be good practice to take profit in what appreciates and buying into lagging assets that become cheaper and/or better value. We also recognise that CBA, being 12% of the Australian share market index, remains very expensive despite having corrected meaningfully in early November.

Australian Equities: Sector Performance

The Australian share market increased marginally in October although, we have seen a reversal since the beginning of November. October saw the market gains come from Banks and Resources. The latter benefiting from a steady trend higher in profit revisions for materials companies on the back of higher commodity prices. Materials (+4.0%) was the best-performing sector over the month, led by Pilbara Minerals (+30.9%) and Mineral Resources (+17.6%), while Information Technology (-7.0%), dragged down by WiseTech Global (- 23.4%) and Xero (-7.9%), underperformed the broader market. At a stock level, the best performers included Pilbara Minerals (+30.9%), Mineral Resources (+17.6%) and South32 (+15.6%), while WiseTech Global (- 23.4%), Light & Wonder (-15.5%) and Treasury Wine Estate (-15.2%) were amongst the biggest laggards.

STAR Portfolio Update

Within the STAR Accelerated Australian shares portfolio Mineral Resources was sold. Mineral Resources has faced its fair share of adversity since its inclusion in the portfolio. The primary concern has been the quality of the road built out at its Onslow iron ore site. The company had to invest a further $250 million to re-surfacing the road after a multitude of accidents. Onslow is crucial for Mineral Resources as it looks to de-gear its balance sheet, with the company carrying $5b in debt. Concerns arose back in April about the potential necessity of a dilutive equity raise to shore up its balance sheet, seeing their share price fall from $40 to $15 per share. At the same time, governance issues around the behaviour of founder Chris Ellison surfaced and the company faced an investor backlash. Shares have staged a huge rally since, with the share price rising over 100% in recent months. Recent strength in lithium prices have also helped the company. The manager used the share price strength to sell out of our position. The portfolio outperformed in October thanks to the holding of Ansell Ltd, Flight Centre and Mineral resources. Dragging on performance were CSL Ltd, BHP and Amcor.

The Road Ahead

The longest government shutdown in US history has meant that economic data is scant and makes navigating financial markets slightly harder than what was already a notoriously difficult task. It is like trying to navigate without a compass. The Federal Reserve’s dual mandate to balance inflation and employment has become more difficult as the US labour market weakens and prices remain sticky while the impact of tariffs still flow through the economy. We continue to expect the U.S. economy will show resilience, though momentum is softening. In Australia, interest rates will remain higher for longer. Bank share prices remain expensive with CBA at the helm of the group, despite falling some 10% in two days following its profit announcement. Our reading of non-government data in the US suggests moderate growth and the possibility that the Federal Reserve remains on hold in December. If rates are indeed higher for longer it implies that valuation multiples should be lower particularly for technology stocks. However, the excitement regarding AI is keeping the bears at bay for now.

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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.