To date we have just scratched the surface on some of the big picture themes, and the new year promises fresh challenges and opportunities. Geopolitics is becoming a dominant force shaping global markets, with government priorities increasingly overriding traditional market-driven resource allocation. The erosion of free trade norms and the rise of protectionist policies are shifting focus from cost efficiency to supply chain resilience and certainty of execution. For investors, this means adapting strategies to align with sectors favoured by policy objectives—such as defense, technology, and energy transition. An emphasis on active management to navigate winners and losers in a fragmented global landscape is as important as ever.

As developed market central banks near the end of their easing cycles, 2026 is likely to mark a transition towards policy normalisation and a renewed focus on inflation management. In a complex environment, bouts of volatility are likely as market expectations around growth and government policy shift.

The most pervasive economic theme, and the one most likely to shape the 2026 outlook, is Artificial Intelligence (AI). How Australia embraces, adopts and implements new technology, and its impact on private capital expenditure will have a strong influence on the economic cycle, and interest rates. After a prolonged period of weak private investment, the AI ramp up phase from investment in software, to the structural implementation of wholesale infrastructure has the potential to tip the domestic and indeed global growth outlook, alleviating pressure on the public sector as the major growth engine.

Changing capital expenditure trends have the potential to influence dynamics in other sectors. The enormous requirement for energy generation and storage in tandem with an ongoing clean energy transition present heightened challenges for policy makers attempting to keep inflation within targeted bands. Upward pressure on yields is possible, reinforcing the need for active duration and curve positioning.

Labour market dynamics including wage pressures, employment trends, and productivity will be pivotal in shaping rate expectations and curve strategies. We expect attention there will be worthwhile in actively managing duration and yield curve positioning and optimising returns for investors. Wage pressures, employment levels and productivity trends are worth monitoring closely.

Within spread sectors, State Governments are well poised to outperform and remain one of our highest conviction active positions. We expect ongoing opportunities in both primary and secondary markets – in both traditional as well as new market segments such as data centers, and issuers helping facilitate a successful energy transition.

While opportunities exist, dispersion across sectors and regions will persist. 2026 will demand agility and selectivity, with opportunities concentrated in sectors aligned to structural priorities and policy objectives. Disciplined use of active management tools and prudent position sizing will be essential to manage risk and capture upside in a fragmented market.