After a year dominated by political noise, inflation surprises and shifting central bank signals, global markets are closing out 2025 on a strong note.
Looking back to the previous quarter, in September, the Federal Reserve’s first rate cut of the year, described as ‘insurance’ marked a turning point in policy sentiment. Risk assets performed strongly, led by emerging markets and China, buoyed by optimism around liquidity, lower tariff-induced inflation than anticipated and a powerful rally driven by artificial intelligence (AI) investment.
The message for markets was clear: liquidity is back, AI spending is booming, and risk appetite is alive.
Looking ahead, the cyclical outlook remains constructive. While global inflation trends vary depending on the region: rising in Japan, volatile in Australia, easing in Europe, and remaining deflationary in China, the broader global trajectory points to moderation, with tariff-related pressures proving temporary and modest.
In addition, it appears central banks are increasingly aligned in their stance, with most major emerging and developed regions still cutting interest rates. The Federal Reserve will likely deliver additional rate cuts over the next 12 months. The European Central Bank has paused, the Bank of England is nearing a similar position, and the Reserve Bank of Australia has shifted to a cautious stance, keeping rates on hold amid upside inflation surprises. In short, global financial conditions have eased, fiscal policy remains a tailwind, and credit creation is robust.
Growth risks now lean to the upside. Strong corporate balance sheets and accelerating AI-driven investment underpin a base case of a soft landing. If productivity gains persist, the cycle could extend well into 2026 and beyond, potentially ushering in a ‘jobless expansion’ where growth continues without significant labour market pressure. Great for earnings, perhaps less great for wages growth.
Against this backdrop, there are some asset classes that stand out for their ability to combine resilience with growth potential:
Global and emerging market equities
Emerging markets remain a bright spot as dollar liquidity eases and global trade stabilises. These markets offer attractive valuations and cyclical upside and stand to benefit from structural participation in AI-driven productivity gains.
We view emerging markets as a compelling opportunity for diversification and exposure to long-term growth, particularly in regions positioned to capitalise on technology investment and improving domestic demand.
Global equities also remain compelling, supported by strong fundamentals. Return on capital is near historic highs, while margins and earnings continue to show resilience, partly fuelled by structural themes like AI adoption.
However, US markets are trading at elevated valuations and remain heavily concentrated in a handful of mega-cap tech names. This makes regional diversification essential, allowing investors to capture opportunities across sectors and geographies while mitigating concentration risk.
Unlisted infrastructure
Unlisted infrastructure continues to attract attention for its ability to deliver stable, inflation-linked returns alongside long-term growth potential. AI adoption is amplifying demand for digital infrastructure, particularly data centres and fibre networks, which provide the compute capacity required for advanced technologies. As businesses integrate AI at scale, the demand for robust infrastructure is expected to grow, with demand far exceeding current supply.
Risks are balanced, but not absent
While the outlook is encouraging, risks are not absent. Downside scenarios include renewed trade tensions, fiscal instability and questions around central bank independence. On the upside, faster than expected productivity gains from AI and automation could further lift growth and market sentiment.
Despite the broader tone pointing to cautious optimism, we view valuation concerns, particularly across US equities and the AI space, as potential contributors to volatility.
Looking ahead
With 2026 fast approaching, we’re facing a market shaped by easing policy, resilient fundamentals and transformative technological investment. However, valuations in parts of the market are sky-high, and we are mindful that this cycle too will end at some stage. For now, however, it appears the question isn’t whether momentum can be sustained, but how to capture the next phase of growth while adequately protecting against the risks that remain.
By Patrick Nicoll, head of asset allocation, MLC Asset Management
