Markets enter a curious and ambiguous phase
Markets have entered a phase in which fundamentals and sentiment seem increasingly disconnected. Any professional investor with a risk-management mindset is likely to be trimming exposures or sitting on the sidelines; while other investors continue to shoot for the moon. The backdrop is ambiguous at best: strong price action and speculative enthusiasm suggest confidence, while positioning and caution among institutional investors imply unease.
Adding to this sense of tension, Buffett’s U.S. market cap-to-GDP ratio—a broad gauge of overall equity market valuation—has reaccelerated to historic new highs. This measure, often dubbed the “Buffett Indicator,” underscores how far asset prices have run ahead of underlying economic output. It reinforces the notion that optimism may be pricing in perfection, leaving little margin for error if growth or earnings disappoint.
Buffett’s U.S. market cap-to-GDP ratio: Back to record highs
Source: Human Financial, Bloomberg
Complicating matters, the current US government shutdown will have markets flying blind on data for the near future. Even once this ends, it will take time for workers to return, clear the backlog, and resume publishing economic reports. In the meantime, investors are likely to discount any short-term negative data as distortion from the shutdown rather than evidence of a genuine slowdown. That, in turn, may sustain the sense of complacency for a while longer.
The bigger question is whether this is simply a cyclical upswing within the market’s long-term structural grind higher, or the makings of a bubble, as some fear. The outcomes appear increasingly binary: to the winner go the spoils. If the AI-driven productivity story delivers, the long-term payoff could be enormous. Yet history reminds us that every transformative technology endures a “trough of disillusionment”, when early exuberance fades before steady progress resumes.
Could AI face that reckoning in the years ahead? Or will the vast ecosystem of spending, innovation and optimism prove resilient enough to power through? Either way, markets today are balancing exuberance and exhaustion in equal measure - a mix that makes prudence feel as contrarian as it is sensible.
Amid this, our consistent identification of an economic regime change remains intact. We believe the global economy is transitioning toward a stagflationary scenario, characterised by persistently higher inflation and slower growth. Historically, that has been one of the toughest environments for asset returns, as both equities and bonds struggle to deliver consistent real gains.
When uncertainty is elevated, valuations are stretched, and the macro regime itself is shifting, our view is that the best course of action is to discount conviction and temper enthusiasm. Confidence can be costly when clarity is lacking. To invest through such an environment, we continue to rely on diversification and maintain a cautious asset allocation stance: seeking to participate where the risk/reward justifies it, while preserving flexibility for whatever comes next.
HF Dynamic Portfolios
The Dynamic portfolios delivered steady gains over the September quarter, supported by a diversified mix of assets and a focus on reducing downside risk.
While short-term returns were a little little lower than peers during a strong market rally, the portfolios’ defensive positioning and disciplined risk management helped to reduce volatility.
Positive contributions from Australian shares and fixed interest exposures demonstrate the value of maintaining balance and flexibility through changing market conditions.
HF Strategic Portfolios
The Strategic portfolios achieved positive returns for the quarter, benefiting from their diversified structure and active asset allocation.
While global equities were the main driver of broader market gains, the portfolios’ measured exposure to growth assets provided strong participation alongside ongoing downside awareness.
The mix of domestic shares, infrastructure, and quality fixed interest exposures helped deliver results consistent with the portfolios’ long-term objectives.
HF Enhanced Index Portfolios
The Enhanced Index portfolios delivered strong results over the quarter, outperforming peers across all risk profiles.
Returns were boosted by strong equity market participation, particularly within international and emerging markets, and by the portfolios’ cost-efficient, transparent investment approach.
The Enhanced Index models continue to demonstrate their ability to capture market growth effectively while maintaining broad diversification and disciplined risk control.