Financial year 2026 closed the way it spent most of its months: eventful in the headlines, and surprisingly uneventful in the index. Tariff shocks, a Middle East conflict that ran far longer than anyone forecast, two market corrections and two full recoveries — and after all of it, the broad Australian market delivered a roughly flat-to-modest result for the year. For investors who rode the index, it was a lot of turbulence for not much altitude.
Beneath that flat surface, however, two things mattered enormously: where you were positioned, and what your defensive assets were paying you while you waited. Both are the subject of this update.
The year the index went sideways
Volatility episodes in FY26 followed a now-familiar script — a sharp drawdown on a geopolitical or policy shock, followed by recovery within weeks. The April 2025 tariff sell-off recovered fully within weeks. The most recent 10% correction retraced the bulk of its fall inside two months. This pattern is well documented: analysis of major geopolitical events over five decades shows equity markets have typically absorbed the shock and recovered within one to three months, with economic events (not conflicts) causing the only durable damage.
Figure 1 — A flat year, but not a quiet one
Our expectation for the next twelve months is more of the same at the index level: a broadly flat general market. Persistent government spending is keeping inflation stickier than central banks would like, which in turn keeps interest rates elevated — a combination that subdues valuation expansion for the market as a whole, even while individual sectors and securities diverge sharply.
What FY26 actually rewarded
The headline index number for FY2026 — the ASX 200 up 2.8%, or 6.1% including dividends — conceals one of the most violent leadership rotations in years. The index is loaded with financials, and financials went backwards. Materials, where active portfolios were overweight, returned 48%. Within the Top 50, eleven stocks fell 30% or more while others soared: Commonwealth Bank fell 12% over the year while BHP rose 63%. Mind the gap.
Figure 2 — FY2026 sector scoreboard
The same dispersion showed up across international and alternative holdings. Against the MSCI World's 21% (a strong year in its own right), the committee's active selections delivered multiples: the currency-hedged US value exposure returned 66% while the famous FANG names managed 3% — the clearest single illustration of where AI earnings are actually being generated versus where the crowd is positioned.
Figure 3 — FY2026: active selections vs the benchmarks
📈 The Merit–Morgans Active Management Program
Why active, why now: only around 15% of market volume trades on fundamentals today. The rest is passive and momentum money strapped to the roller coaster. In a market this concentrated and this leveraged, resilience and the ability to act are the product. This is the program your SMSF and personal portfolios run on.
Exhibit: Concentration risk hiding in the benchmark — financials and materials are 50.7% of the ASX 200; information technology is 31.3% of the S&P 500. Source: S&P sector weights at 13 June 2026, via Morgans Partnerships Investment Committee.
Client portfolios under the Merit–Morgans partnership run on direct holdings, institutional research (30-plus specialist analysts and Chief Economist Michael Knox), a dedicated broker relationship, and active repositioning when markets move — not a set-and-forget index. Every holding is there to play a defined role, and when the world changes, the portfolio changes with it.
Figure 4 — Balanced risk profile: indicative allocation
| Balanced Risk Profile — Indicative Allocation | Weight | Role |
|---|---|---|
| Australian equities (dividend and franking focus) | 30% | Income engine — franked yield |
| International equities | 15% | Growth — AI, technology and global leaders |
| Hybrids and subordinated debt | 20% | High, reliable income above bank rates |
| Private credit and fixed income (quality-screened) | 15% | Yield uncorrelated to equities |
| Property and infrastructure securities | 5% | Inflation-linked income |
| Alternatives and gold | 7.5% | Portfolio insurance, traded tactically |
| Cash | 7.5% | Liquidity and opportunity reserve |
🧠 From Our Latest Investment Committee (July 2026)
The one word for this cycle: resilience. The committee's view is that portfolios must be built to absorb multiple outcomes, not predict a single one. A passive index fund is a roller coaster you are strapped into — left, right, up, down, nothing you can do. An active portfolio has checks and balances: when something in the world breaks, something in the portfolio rises, and those profits become earned liquidity to buy what got unfairly sold. That discipline is the whole difference. As the Future Fund's Raphael Arndt puts it, a stagflationary environment — growth falling while inflation rises — is historically terrible for asset returns, and static allocations should be abandoned in favour of a whole-of-portfolio approach where every holding plays a defined role.
Exhibit: Who is actually trading — fundamental research now around 15% of US average daily volume. Source: Goldman Sachs, via Morgans Partnerships Investment Committee, June 2026.
Government spending is driving inflation. RBA Governor Michele Bullock has warned federal and state treasurers directly that extra budget spending makes surging inflation harder to reduce — “it doesn't take much additional spending to make the job of returning inflation to target more challenging” — as she delivered the third consecutive rate rise this year, with federal spending as a share of the economy at a 40-year high excluding the pandemic. Chief Economist Michael Knox expects a further one to two rate hikes and tight conditions out to 2028, with rates unlikely to fall meaningfully before then. Portfolios are positioned for restrictive conditions: commodities, real assets and floating-rate income, not long government bonds.
The Iran conflict was expected to run 14 days like the 16 before it; it ran more than 100. Closing the straits that long drained the world's three-month fuel “hose” — the chain of tankers, refineries and storage tanks between a wellhead and your tank. Refilling it while meeting daily demand adds an estimated 3 to 4 million barrels a day of extra demand for up to three years, which means any price fall on the straits reopening is likely to be short-lived — a structural tailwind for Australia's resources exporters.
The committee's discipline here is worth noting: energy was sold into the initial spike (the base case was a short conflict), profits were banked into beaten-up industrials — and now, with the thesis changed from temporary price shock to structural supply constraint, exposure is being prudently rebuilt in quality oil and gas equities with cash-flow resilience, alongside uranium (in structural supply deficit, with rising demand from AI and electrification) and coal as strategic baseload for the 10 to 15 year transition. One analyst scenario has sustained higher prices lifting a major LNG producer's valuation by up to 90%.
Energy in your portfolio is now three things at once: an inflation hedge, a geopolitical hedge, and a national-security theme.
The boom has shifted from software to hardware — the “picks and shovels” layer of memory, storage and high-bandwidth memory that powers data centres, training and inference. The committee's preferred US value exposure (currency-hedged, with a meaningful weighting to memory-chip maker Micron) returned 66% this financial year while the famous FANG names managed 3%; the hedged Nasdaq returned 26% and the S&P 500 18%. Micron's latest quarter illustrates why: revenue of US$41.5 billion, adjusted gross margin near 85%, and guidance to US$50 billion next quarter on multi-year AI data-centre agreements — yet it trades at a fraction of the US market's average earnings multiple.
Software is the other side of that coin. Businesses on 30 to 50 times earnings are being repriced because AI agents can increasingly replicate what subscription software does — the committee's filter for survivors is network effects, proprietary data an AI cannot access, and customers who most need a trusted provider. The scale of the physical buildout underwrites the hardware case: the US operates roughly 51 gigawatts of data-centre capacity today against a development pipeline exceeding 356 gigawatts — requiring three and a half times America's entire current nuclear fleet to power — which is one of the strongest quantitative arguments for copper, uranium, gas infrastructure and electrical equipment suppliers.
Closer to home, Australia's only genuine AI-infrastructure stock — a data-centre connectivity business with a footprint of more than 1,100 data centres across 31 countries — is up over 220% since April; clients were advised to take up full entitlements in its recent discounted capital raising. And because the most influential AI companies (Anthropic, OpenAI and others) are still unlisted, pre-IPO vehicles now offer exposure ahead of their expected listings — mega-cap technology exposure is not the same thing as AI exposure.
Exhibit: US data centres, operating (green) and planned (orange) — the pipeline exceeds 356 GW against 51 GW operating. Source: Morgans Partnerships Investment Committee, June 2026.
US margin lending passed a record US$1.4 trillion in May; leveraged ETFs have multiplied since 2020; and only around 15% of US market volume now trades on fundamental valuation — the rest is passive and momentum money that amplifies every move. Hedge fund leverage is concentrated in a small group of US technology names, so the risk is not that the AI thesis is wrong — it is that ownership is so crowded that even small disappointments trigger outsized moves. De-crowding could be set off by slower hyperscaler spending, weaker returns on AI capex, margin pressure, regulation, rising bond yields or a macro slowdown.
Exhibit: US margin debt at record levels. Source: FINRA, via Morgans Partnerships Investment Committee, June 2026.
Then there is SpaceX — the largest listing in history, a single company now valued around US$2.2 trillion, within touching distance of the entire Australian Stock Exchange (roughly US$2.4 trillion across 2,000-plus companies). Its staggered lock-up schedule injects new share supply into the market continuously for six months, forcing index funds to sell existing giants to fund each unlock. Professional leverage exits fast when stories wobble — expect sharp air-pocket falls with no news attached.
Exhibit: One company vs 2,000+ — SpaceX’s valuation approaches the market capitalisation of the entire ASX. Source: Morgans Partnerships Investment Committee, June 2026.
This is precisely why the portfolios carry counterweights positioned for a technology pullback alongside the AI exposure.
Government bonds are off the table. The numbers on the leading passive Australian bond index fund make the case on their own: a one-year total return of 1.34% and a five-year return of 0.32% per annum — it has not beaten inflation for more than a decade. The era of buying a bond index and forgetting about it has ended.
Exhibit: Passive fixed interest returns — the leading Australian bond index ETF returned 1.34% over 1 year and 0.32% p.a. over 5 years to 31 May 2026. Source: Morgans Partnerships Investment Committee, June 2026.
The committee prefers floating-rate and structured income, where yield is no longer scarce: Tier 2 subordinated bank debt around 6 to 6.5% with defined maturity outcomes, listed corporate and structured credit around 7.6% (floating, so it rises with any further hikes), quality-screened private credit around 8% or better, and selected notes trading at discounts have offered double-digit running yields. Income streams remain intact and rise with rates; capital prices will wobble in risk-off periods — and buying those discounts is the opportunity, not the risk, provided the manager is right.
Credit quality is everything: widely advertised non-prime mortgage funds carry default rates many times bank levels and redemption gates, while the preferred exposures carry senior secured lending, conservative loan-to-value limits, tranche protection and daily ASX liquidity. Private credit is going through a stress-testing phase, not a collapse — and assessing that difference is exactly what you pay an adviser for.
Gold allocations added in 2022–23 did their job as portfolio stabiliser and hedge against government debt and a weaker US dollar — and the surge in silver speculation was the committee's rules-based trigger to take part-profits, removing behavioural bias from the decision. The view now: gold moves in long cycles and we are mid-cycle, with a retracement likely before the next leg higher. Positions are being held at reduced weight, with the realised profits already recycled into energy and beaten-up cyclicals.
A portfolio implemented 2 April 2026: gold positions sold into conflict-driven strength (one up 25%), energy sold after the spike, a healthcare name exited near its highs — proceeds rotated into beaten-up industrials and infrastructure names now up 10% to 22%, plus the AI-connectivity stock up over 220%, and a rights issue where clients applied for 150% of their entitlement at $14.30 against a $21 market price. Result: approximately 11.5% after all costs and fees in the first three months, with portfolio turnover kept modest.
A second portfolio, implemented October 2025 with $730,000, was worth approximately $800,000 by June — estimated growth of 9.58% after fees, before counting income. Same playbook: gold sold up 25%, energy names sold up 19% and 29% (one since re-entered 13% lower), proceeds recycled into the recovery names. That is what “everything in the portfolio plays a role” looks like in practice — rules-based profit-taking that removes emotion, and capital flexibility to invest into weakness rather than chase strength.
Committee views as at June–July 2026 and subject to change; not a recommendation. All performance figures cited (including sector and fund returns, the 11.5% and 9.58% client examples) are historical, relate to short periods or specific mandates, and are not a reliable indicator of future performance.
The quiet story: income assets are paying like growth assets
The more consequential development for portfolio construction is on the other side of the ledger. With the cash rate elevated — and further increases still on the table — the floating-rate securities held across client portfolios are generating gross running yields that a decade of near-zero rates made unthinkable.
Figure 5 — What the income side is paying
Consider what this means. High-quality credit and hybrid securities — instruments whose income floats above the bank bill rate and whose issuers are among the strongest names in the country — are paying gross yields in the high sixes to around eight per cent. That is near the long-run total return of the equity market, generated without direct equity volatility. Even cash buffers are now paid to wait.
For retirees and pension-phase investors, the arithmetic is more compelling again. Inside a superannuation pension account the fund pays zero tax, so franked income is grossed up in full — every franking credit attached to a dividend or hybrid distribution comes back to the fund as a cash refund. An income-weighted allocation in that environment is not a defensive compromise; it is a deliberate return strategy.
How we are positioning portfolios
Our strategic asset allocation framework is anchored to independent research house benchmarks, with each profile managed within tolerance ranges rather than to rigid percentages. Those ranges exist precisely for environments like this one. Currently, across client portfolios we are:
Current positioning
- Running the income sleeve at the top of its range. Floating-rate credit, hybrids and diversified income funds are being held at or above benchmark weight while gross yields remain at these levels.
- Deploying into growth assets in stages. Rather than committing capital in a single tranche, we are averaging into equities through the volatility, prioritising quality franchises marked down in corrections.
- Keeping cash productive and purposeful. Cash buffers are maintained for liquidity and pension payments — and at current rates, they are earning while they wait.
- Backing active selection over index exposure. In a flat, dispersed market where only around 15% of volume trades on fundamentals, we expect security selection and sector rotation — not the index — to do the heavy lifting on the growth side.
- Carrying counterweights, always. Gold, energy and alternatives positioned so that when something in the world breaks, something in the portfolio rises — creating earned liquidity to buy what got unfairly sold.
- Rotating as conditions change. When the rate cycle turns, the same tolerance ranges allow us to shift weight back toward growth assets ahead of the repricing.
Figure 6 — The growth / income spectrum
The bottom line
We are not in normal market parameters, and portfolio settings should reflect that. For the next couple of years, we believe investors can afford to let the income side of the ledger do unusual amounts of work: gross running yields from the high sixes to eight per cent or better on quality credit and hybrids, franking refunds amplifying after-tax outcomes for pension-phase investors, and cash that finally pays its way. Meanwhile, staged deployment, counterweights and active selection position the growth side to capture the dispersion a flat index conceals — and to act when the leverage-driven air pockets arrive.
Strategy, as always, is set client by client — anchored to your agreed risk profile and adjusted within its ranges as conditions evolve. If you would like to discuss how this positioning applies to your own portfolio, we are a phone call away.
M 0431 188 135 | E jim@meritfp.com.au