Growth at reasonable yield (GARY) keeps the bears outperforming the bulls when we have asset bubbles in everything

Global growth to value and yield rotation cycle has started

The global investment narrative is beginning to shift from growth at any price towards value, income and cash-flow durability. After years in which mega-cap technology and AI-related stocks dominated capital flows, increasingly demanding valuations and a higher-for-longer interest-rate environment are forcing investors to reassess where the next leg of returns will come from.

The rotation is not necessarily a rejection of growth. Rather, it reflects a growing preference for companies where earnings, dividends and free cash flow provide a tangible return, rather than relying primarily on multiple expansion. As bond yields remain structurally higher and economic growth becomes more uneven, the valuation premium attached to long-duration growth assets becomes increasingly difficult to justify.

A critical structural factor is the possibility that the multi-decade bond yield cycle has turned. From roughly 1940 to 1980, long-term bond yields rose as inflation and nominal growth increased, before entering an extraordinary four-decade secular decline from around 1980 through 2020. The decline in yields from their 1980 peaks to the ultra-low rates of 2020 provided a powerful tailwind for long-duration assets, particularly growth stocks, as falling discount rates supported ever-higher valuations. If the 2020 lows marked the end of that secular bond bull market and yields have entered a longer-term rising cycle, the investment implications are significant. A structurally higher cost of capital makes future earnings less valuable today and favors current cash flow, dividends, balance-sheet strength and pricing power over distant growth expectations.

This creates a more favorable backdrop for banks, insurers, energy, infrastructure, utilities, telecoms, consumer staples and selected industrials, where income and established cash flows can provide greater downside protection. Given the local sector multiples, financial sectors like banks, insurers and property sectors are trading at expensive multiples while sectors linked to asset bubbles and consumer spending are facing substantial cyclical downside risks. Commodity producers also stand to benefit where constrained supply and elevated geopolitical risks support pricing power.

The key investment signal is therefore changing: capital is increasingly being rewarded for quality of earnings rather than simply the promise of future growth. In this environment, dividend yield, balance-sheet strength, pricing power and sustainable free cash flow become critical portfolio characteristics.

For investors, the opportunity may be less about abandoning growth altogether and more about rebalancing portfolios after an extended period of growth-stock leadership. The next phase of the cycle could favour companies that can compound shareholder returns through earnings growth and distributions, particularly if economic growth slows while inflation and bond yields remain elevated.

Global Macro Cycles

Global mega passive funds continue to channel capital into US technology leaders, reinforcing the familiar flow-driven market dynamic in which index concentration and passive demand can sustain elevated valuations even as underlying fundamentals begin to deteriorate. This disconnect between liquidity-driven price strength and weakening macro conditions is becoming increasingly important as investors confront a more hostile global backdrop.

At the same time, the Middle East conflict has broadened materially. The US has moved from ceasefire rhetoric towards sustained military action following Iran’s assertion of control over the Strait of Hormuz, while Iranian retaliation has increasingly drawn in countries hosting US military assets. Israel has also resisted expectations of a rapid withdrawal from territories entered during recent conflicts. Elsewhere, Saudi-linked forces have reignited fighting with Yemen’s Houthis, who have responded by disrupting Saudi-linked trade through the Red Sea. The result is a potentially dangerous situation in which two critical global shipping corridors are facing sustained disruption, creating renewed risks to energy prices, freight costs and global supply chains.

Yet despite repeated threats of further escalation, the US has shown signs of restraint. One important constraint is the bond market, with long-term Treasury yields rising towards levels not seen since before the global financial crisis, increasing the fiscal and economic cost of prolonged military engagement. At the same time, political and military bandwidth is becoming increasingly limited. Without a credible strategic exit, the risk is that future escalation becomes increasingly driven by political optics and the need to demonstrate strength rather than a clearly defined endgame.

The pressure is also extending into global financial markets. Japan and the US have reportedly been forced towards coordinated currency intervention as rising Japanese rates threaten to unwind the yen carry trade, a major source of global liquidity that has helped support risk assets and US technology valuations. A disorderly reversal could expose how dependent parts of the global asset bubble have become on cheap funding and persistent liquidity.

The macro backdrop is therefore becoming increasingly fragile. Slowing global growth, renewed energy and shipping inflation, elevated government debt, rising long-term bond yields and stretched equity valuations create an unusually difficult combination for investors. The unwinding of the AI-driven valuation cycle could amplify this pressure, while another inflationary wave risks producing a potentially damaging second inflation cycle just as economies are losing momentum.

Investors are consequently entering increasingly uncharted macro territory. Markets remain priced for resilience, with major equity benchmarks trading at multi-decade valuation extremes, while the underlying environment is becoming less supportive. The central investment question is no longer simply whether earnings can grow, but whether current valuations adequately compensate investors for the possibility of slower growth, structurally higher discount rates, renewed inflation and rising geopolitical risk.

In this environment, liquidity can continue to delay the adjustment — but it cannot eliminate the underlying valuation and macro risks. The greater the disconnect between passive flows and fundamentals becomes, the greater the potential volatility when the flow eventually reverses.

Investment Portfolio Strategy

Yield investing has entered a more challenging phase as the global macroeconomic regime shifts towards higher inflation uncertainty, elevated bond yields and greater geopolitical risk. US fiscal and policy decisions continue to influence inflation expectations, while persistent government debt, changing trade policies and geopolitical tensions are creating greater volatility across interest rates and capital markets. For income investors, the key issue is no longer simply finding the highest yield, but identifying sustainable income without taking disproportionate capital risk.

This makes the balance between income generation and capital preservation increasingly important. High-yield bonds and high-dividend equities can provide attractive cash returns, but their yields often rise precisely because markets are pricing greater economic, credit or earnings risk. Conversely, traditionally defensive assets such as government bonds offer greater capital stability, but their real returns can be eroded if inflation remains structurally elevated. Headline yield, therefore, can be misleading unless it is assessed alongside valuation, balance-sheet strength, inflation risk and the sustainability of underlying cash flows.

This is where the Growth at Reasonable Yield (GARY) approach becomes particularly relevant. Rather than simply chasing the highest available yield, GARY focuses on companies capable of combining sustainable income, reasonable growth, strong cash generation and disciplined valuations. The objective is to build a portfolio where dividends are supported by underlying business performance rather than financial engineering or excessive leverage.

In an environment of elevated interest rates, slowing growth and geopolitical uncertainty, adaptability becomes a critical component of yield investing. The best income opportunities are not necessarily those offering the highest yield today, but those capable of maintaining and growing distributions while protecting capital through the cycle.

For investors, GARY provides a framework for navigating this regime by prioritising quality, valuation, cash flow and sustainable yield rather than yield alone. Over the long term, this approach aims to deliver attractive income while maintaining the flexibility to reposition as the macroeconomic cycle evolves — seeking to capture the benefits of yield without sacrificing the discipline of risk management.

Model Portfolio

The best performers YTD in the Growth at Reasonable Yield (GARY) Top 10 are: Woodside (ASX: WDS), New Hope (ASX: NHC), Dicker Data (ASX: DDR) and APA Group (ASX: APA).

Note: DDA may or may not have made changes to the model holdings. The data driven model portfolios will continue to evolve with the economic and market cycles.