June Wrap Up - A rebound in shares. What does that mean from here?

It has been a chaotic past few months. Conflict, tariffs, US tax bills that will likely blow out budget deficits. There have been a lot of reasons to worry. The US market (S&P 500) did worry, briefly, falling into a bear market, down 19% since its peak in late February. Since then, US shares have experienced the fastest ever recovery from a close to 20% fall. What were we all worried about? Putting aside our lingering concerns that this dramatic turnaround may be a little over optimistic, it's a great reminder of how unpredictable markets can be over very short time periods. The antidote for this is to focus on fundamentals and medium and long-term trends in markets and economies. But in a world that is rapidly transforming, it's complicated. The past strategy anchors of the business cycle are becoming less useful in predicting the future. Instead, we lean into our mega forces framework and become more tactical and targeted in portfolio positioning. 

There have been a lot of reasons for share market investors to fret. Conflict in Europe and the Middle East, patchy economic data and lingering concerns around the impact of tariff wars all cast legitimate doubt on the outlook for economic growth and put upward pressure on inflation. That's not a great combination for markets.

Despite that, and despite the dramatic fall in share prices following President Trump's Liberation Day announcement on 2 April, shares rebounded strongly. The United States market as measured by the S&P 500, for instance, is back at all-time highs.  

It's always hard to pinpoint the exact reasons behind short-term market movements. A combination of more favourable tariff negotiations than initially hinted at, strong technology company earnings, and a market prepared to look past softer US economic data and expecting a rebound are likely the reasons. 

That said, risks are ever-present, and valuations - particularly in the US and among the market's largest companies - are looking stretched once again. 

The challenge for all investors, in our view, is deciphering the signal from the noise. Determining what counts and what will drive markets over the medium term.

BlackRock, ASB's investment partner, has just published its midyear investment outlook, outlining their views on this.

At the core of their thinking is, perversely, what will not drive markets. In the past investors have been able to anchor their thinking on broad macro-economic cycles. There was a predictability to these cycles that helped inform how we shaped portfolios. 

BlackRock argues that there is a transformation underway in the global economy. This is driven by shifts in geopolitical power, as supply chains are rewired, as the sources of energy we use change and as AI becomes pervasive. These transformations will impact economic cycles and create economic volatility. Relying on investment approaches that worked in the past is unlikely to be successful in this transforming environment.

BlackRock points to two key ways to manage this for investors. 

The first is to move the focus on portfolio positioning from the very long term to more of a tactical and targeted approach, but this doesn't necessarily mean, as an ASB investor, changing your investment strategy. For instance, if you are happy with your growth fund or conservative fund and there have been no material changes in your personal situation, your choice is likely to remain the right option. For those more active deviations we make from longer-term portfolio weights, it argues for a dynamic approach. As BlackRock puts it in their midyear report: "Near-term outcomes are clearer than the long term - a reversal of usual investing logic - so we put more emphasis on tactical views." What this means for the ASB portfolios is a more frequent review of the portfolio's asset allocation and use of tactical risk mitigation strategies.

The second consideration is around the role of mega forces in informing portfolio construction. By mega forces we mean those long-term trends that are driving the transformation of the global economy. These include changes in geopolitical leadership away from the US towards a more multipolar world, the rise of AI, the move towards new energy sources including green energy and the divergence of demographics between the western and emerging economies as birthrates in the west plummet. 

BlackRock are of the view that these mega forces are more durable than the macro-economic cycle, so have become more relevant anchors around which we can build portfolios. Our targeted investments in areas like infrastructure, a key underpinning of the AI buildout, are good examples of how ASB portfolios are profiting from this theme.

It is a transforming world but by focusing on durable trends we can position portfolios appropriately and see the signal amongst the noise.

This material has been created with the co-operation of BlackRock Investment Management (Australia) Limited (BIMAL) ABN 13 006 165 975, AFSL 230 523 on 08/07/2025. This material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. Refer to BIMAL's Financial Services Guide on its website for more information. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product in any jurisdiction.