July Market View – Navigating Policy Shifts with Clarity

The second half of 2025 has begun with a blend of cautious optimism and selective risk-taking. Recent data shows a resilient consumer in several major economies, even as manufacturing in parts of Asia continues to underperform. Sentiment indicators in Germany and Japan have edged higher, suggesting some momentum, while in China, policymakers are still working to revive domestic demand.

Against this backdrop, policy direction from central banks remains a defining influence. Liquidity conditions, interest rate paths, and fiscal initiatives will set the tone for markets in the months ahead.

Macro Overview

Economic trends in July highlighted the divergence between regions:

• Australia: Retail sales rose 1.2% month-on-month in June, led by household goods and boosted by mid-year discounting.
• United States: The ISM Services PMI returned to expansion territory at 50.8, while retail sales posted a strong 0.6% gain.
• Europe: The German ZEW Economic Sentiment Index climbed to 52.7, indicating improving confidence in the region’s largest economy.
• Japan: The Tankan manufacturing index improved modestly to 14, breaking a two-quarter decline.
• China: The manufacturing PMI slipped further to 49.3, underscoring ongoing weakness and the challenge of stimulating demand.

Monetary policy remains in flux. The Reserve Bank of Australia is widely expected to lower rates in August, potentially adding momentum to domestic earnings growth. The U.S. Federal Reserve has held rates steady, weighing the inflationary risk of new trade tariffs against the need to maintain growth.

Global inflation outside China is still elevated relative to the past decade. Liquidity injections from key central banks are anticipated to provide medium-term support to risk assets, though the scale and timing of these measures will be critical.

Asset Class Outlooks

Equities

Corporate earnings have generally exceeded expectations, with particular strength in industries aligned to structural growth drivers such as AI infrastructure, energy transition projects, and advanced manufacturing. Lower domestic rates could broaden earnings growth across more sectors in Australia, while internationally, selective exposure to both cyclical and growth opportunities remains prudent.

Valuations in several markets are full, making entry discipline important. Preference leans toward companies with strong balance sheets, durable margins, and clear links to long-term demand themes.

Fixed Income

Current yield levels provide attractive income opportunities, especially in high-quality credit. Short-to-intermediate maturities strike a balance between yield capture and protection from duration risk should inflation pressures re-emerge.

Opportunities also exist in relative value positioning across geographies, particularly in markets expected to move into easing cycles earlier.

Alternatives & Commodities

Gold and other precious metals continue to provide a defensive hedge in an environment where geopolitical risk and inflation concerns remain. Infrastructure assets—particularly those tied to renewable energy, energy storage, and digital connectivity—are benefiting from sustained capital investment and policy tailwinds.

Private markets are seeing improved entry points as valuations adjust, though rigorous selection remains key.

Foreign Exchange

The Australian dollar is likely to be influenced by the interplay between domestic monetary easing and Chinese commodity demand. U.S. dollar moves will hinge on shifts in rate expectations and the broader geopolitical landscape.

Positioning Considerations

Market conditions call for flexibility in allocation and clarity in portfolio construction. With a constructive medium-term outlook but the potential for short-term swings, strategies should emphasise:

• Selective growth exposure anchored in durable structural themes.
• Maintaining liquidity to act on dislocations when they arise.
• Diversified income streams across credit quality and maturity profiles.
• Real assets and commodities as inflation hedges.
• Ongoing review of sector and regional weights in response to policy shifts.

Clear rationale in positioning—supported by data and forward-looking scenarios—remains essential for maintaining confidence in investment decisions during periods of volatility.

Base Case View

The prevailing outlook supports a constructive stance toward risk assets through year-end. Expectations for rate cuts in select economies, alongside fiscal initiatives and targeted liquidity injections, provide a platform for continued earnings resilience.

Australian equities should benefit from a more supportive domestic policy setting, while globally, structural growth areas such as AI investment, renewable infrastructure, and energy transition remain compelling. Fixed income offers steady income potential and portfolio balance.

Bear Case Risks

Potential downside catalysts include:

• More aggressive or prolonged U.S. tariffs, lifting global inflation and disrupting trade flows.
• Weaker global consumer demand leading to earnings downgrades.
• Abrupt withdrawal of central bank liquidity.
• Escalation in geopolitical tensions affecting supply chains or commodities.
• Renewed stress in China’s property sector spilling into broader growth.

In such scenarios, a shift toward defensive allocations—quality sectors such as healthcare, utilities, and staples, alongside elevated cash—would be expected.

Bull Case Upside

Upside potential lies in an environment where inflation eases, trade tensions remain contained, and coordinated fiscal stimulus accelerates growth. Such conditions could broaden earnings growth beyond current leaders, with cyclical sectors participating in the rally.

This would favour a reduction in cash buffers, an increase in cyclical equity exposure, and a tilt toward markets and sectors most leveraged to accelerating nominal growth.

Closing Perspective

The coming months are likely to test market resilience as policy, trade, and growth narratives evolve. Underlying drivers—monetary easing in parts of the world, targeted fiscal spending, and sustained demand in structural growth sectors—remain supportive for a pro-growth allocation.

Success in this environment rests on agility: the ability to capture upside in favourable conditions, while executing a disciplined shift toward protection when risk signals rise. Those who combine conviction with adaptability will be best positioned to navigate the uncertainty and harness the opportunities ahead.

This publication is prepared by First Financial Pty Ltd (ABN 15 167 177 817) AFSL 481098.

The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.

Some numerical figures in this publication have been subject to rounding adjustments. First Financial Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect First Financial Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.

Past performance is not a reliable guide to future returns.