Capital on the move: Why 2026 is shaping up as Australia’s year

Last year was dominated by a range of themes including geopolitics, de-dollarisation, volatile moves interest rates that has been driving capital flows and demand for yield.

There were three Australian interest rate cuts across 2025, although we did expect four at the start of the year.

Heading into 2025, we had anticipated a positive year but were also concerned that the market had underestimated the impact of US President Trump’s election.

Ahead of Liberation Day, investors that had increased cash positions and lengthened interest rate duration were able to take advantage of rising credit spreads by deploying cash, taking profits on interest rate positioning and the shape of yield curves.

On the whole, Trump’s activities have been a positive for risk assets. Despite the US economy having moved into a period of slower growth, with rising inflation and record indebtedness, we’ve seen foreign investors moving away from USD denominated assets.

The Australian credit market has benefitted from this move, helping to elevate Australia to being the third largest credit market by issuance behind the US and Europe.

2026 outlook: diverging central bank policies, high credit quality and capital flows

There’s much to be positive about heading into 2026.

Amidst significant uncertainty, it is clear to us that there is a widening divergence in the economic data coming out of the US and Australia. 

Markets have priced this divergence for the year ahead, with the US continuing to focus on rate cuts while the local market prices for some level of tightening in cash rates. 

Whilst we agree with this divergence, we think markets are jumping at shadows over the recent rise in Australian inflation.

Non-interest rate sensitive factors like electricity, tobacco and the recent rise in precious metals have contributed to the increase.

We expect many of these items to slowly decline in the coming quarters, which will see inflation trending back to the middle of the RBA’s range across 2026, leaving room for the RBA to deliver an additional cut or two.

Meanwhile, the US economy is heading into a period of slower growth, rising inflation, record indebtedness and growing unrest via Trump’s manic Presidency. This backdrop adds little confidence to a strong USD, stretched equity valuations and credit spreads that are trading near historical lows. 

We expect Australian GDP growth to accelerate to 2.2% in 2026, outpacing that of the US at 1.6%.

In 2026 Australia looks to have a superior growth and inflation outcome than the US, with higher short-term interest rates (for the first time in over a decade), stable political environment and a cheap currency. 

This environment leaves Australia well positioned to attract foreign capital into our financial markets. With higher yields, wider credit spreads and a cheaper equity market, why wouldn’t foreign investors lift their exposure to Australia and gain access to a cheap currency?

This backdrop should be conducive to quality returns in 2026 that in some ways looks and feels a lot like a repeat of 2025.

Managed Fund

Yarra Enhanced Income Fund

Australian Fixed Income

View