Global markets delivered mixed but generally resilient outcomes over the December quarter. After a volatile start, conditions improved toward year end as investors gained confidence that interest rates are approaching their peak. The US Federal Reserve’s December rate cut provided support to markets, while corporate earnings continued to prove more resilient than expected.

Australian share markets were more volatile and finished the quarter modestly lower. Stronger-than-expected inflation and economic data led investors to reassess how long interest rates may remain elevated, weighing on interest-rate-sensitive sectors. However, support from resources, helped by firmer commodity prices, and the relative stability of financial stocks helped limit broader market weakness.

International share markets produced positive results overall. Developed markets such as the US and Europe benefited from steady earnings and easing interest rate expectations. Asian markets were more mixed, with Japan continuing to outperform due to improving domestic conditions and clearer policy direction, while emerging markets delivered positive returns despite ongoing challenges in China.

Australian shares experienced a challenging quarter, with returns impacted by higher interest rates and ongoing inflation concerns. Despite this environment, the portfolio’s exposure to Australian equities remained relatively resilient, supported by holdings in quality businesses with strong balance sheets and sustainable earnings.

Some growth-oriented holdings experienced a period of consolidation following strong gains earlier in the year. As a result, the Greencape Broadcap Fund and Australian Eagle Trust faced modest headwinds during the quarter, despite underlying company fundamentals remaining sound.

Resources and materials contributed positively as commodity prices strengthened, helping offset weakness in interest-sensitive sectors such as property and consumer discretionary. Allan Gray (+18.3% calendar year) benefited from strong contributions from mining companies, including Alcoa and Newmont. Similarly, L1 Capital Long Short (+46% calendar year) benefited from positions in  Similarly, L1 benefited from positions in Mineral Resources and WestGold Resources as Lithium bounced back from subdued prices and gold continued its strong performance. Financial stocks remained relatively stable throughout the period, supported by solid profitability and disciplined capital management.

Overall, the portfolio maintained a balanced exposure across sectors, with a continued focus on companies well positioned to navigate a higher interest rate environment. Smaller companies held up comparatively well, particularly those with exposure to resources, providing additional diversification within the Australian equity allocation. Macquarie Australian Small Companies Fund (+29.4% calendar year) was able to capitalise on the small caps outperforming large caps with an overweight in Regis Resources and underweight to Droneshield and Eagers Automotive contributing positively.

International equities were a positive contributor over the quarter, supported by steady economic growth and improving confidence around the outlook for interest rates. US and European markets delivered solid returns as earnings remained resilient and inflation pressures continued to ease.

Exposure to long-term structural growth themes, including artificial intelligence and related infrastructure, continued to support returns, although gains were more selective than earlier in the year. Japanese equities performed strongly, reflecting improving corporate governance and favourable domestic conditions.

As market leadership broadened beyond large technology companies, cyclical and value-oriented stocks performed well during the quarter. This environment supported the performance of Barrow Hanley Global Shares, while weighing on relative returns for growth-focused strategies such as T. Rowe Price Global Equity.

Global small companies performed strongly during the quarter as market leadership broadened. However, the Artisan Global Discovery Fund underperformed, driven by share price weakness in Babcock and Sea Limited following strong prior gains and increased investment weighing on near-term profitability expectations. On the other hand, Arrowstreet Global Small Companies added 15.8% for the calendar year.

During an otherwise constructive quarter for markets, returns from the GQG Global Equity Fund were impacted by its exposure to utilities, which underperformed the broader global market. GQG continues to play an important role in the portfolio, providing downside protection during periods of market stress and a contrarian investment style that enhances overall diversification.

Currency movements also influenced returns, with fluctuations in the Australian dollar impacting offshore investments. A more supportive currency backdrop contributed to strong absolute returns in emerging markets, where the Pzena Emerging Markets Value Fund (+25.6% calendar year) was able to add value through active management.

Listed infrastructure and property assets experienced mixed conditions over the quarter, reflecting ongoing sensitivity to changes in interest rate expectations. Higher bond yields earlier in the period placed pressure on valuations, although conditions stabilised toward year end as rate expectations moderated.

Despite short-term volatility, real assets continue to play an important role in the portfolio by providing diversification, income and inflation protection. Infrastructure assets with regulated or contracted cash flows remained relatively resilient, while property exposures remained focused on higher-quality assets with strong tenants and improving fundamentals.

Atlas Infrastructure delivered strong outcomes (+23.1% calendar year) through effective stock selection in regulated energy utilities and favourable country positioning, particularly in Europe. The 0% allocation to property has benefited the portfolio due to challenging conditions for this asset class.

While inflation has moderated across major economies, uncertainty remains around the timing and pace of future interest rate cuts, particularly in Australia. Equity valuations remain elevated in some areas of the market, which may result in more uneven returns over time.

In this environment, diversification and disciplined portfolio construction remain critical. The portfolio continues to balance different managers, investment styles and market perspectives, aiming to deliver more consistent outcomes across a range of market conditions.

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