Saward Dawson > Wealth Advisory Wrap > Monthly View > October 2025
A look back at last month and an outlook for the months ahead
What we liked
- The Fed cut its benchmark rate to 4.00–4.25%, effectively delivering a 25 bps easing.
- U.S. ISM Services PMI jumped to 52.0 in August (from 50.1), beating expectations and indicating continued strength in the services sector.
- U.S. retail sales rose 0.6% in August (following a revised 0.6% in July), well ahead of the 0.2% consensus, underscoring resilience in consumer demand.
- In the U.K., retail sales volumes increased 0.6% in July—trumping the expected 0.2% gain—though it comes amid a backdrop of mixed European macro data.
- Germany’s ZEW Economic Sentiment index climbed to 37.3 in September from 34.7 in August (versus consensus ~27.3), signalling improved business outlooks ahead.
What we didn’t
- Australia’s CPI climbed 3.0% year-over-year in August (from 2.8% in July), above expectations—underscoring the risk of inflation inertia and potentially constraining the RBA’s ability to cut rates aggressively.
- Australia’s unemployment rate held at 4.2% in August, though labour force data hint at softening in hiring momentum.
- U.S. job openings fell to 7.18 million (end July), down from 7.35 million in June and below forecasts, extending the narrative of mixed U.S. labour dynamics.
- U.S. job growth weakened sharply in August, and the unemployment rate rose to about 4.3% (near a four year high). While still moderate by historical standards, the slowdown raises questions—especially given distortions from migration and deportation flows.
- In Europe, retail sales fell 0.5% month-on-month, missing expectations and reversing June’s 0.6% gain—another signal of macro softness in the region.
Base Case
Our view of the most likely scenario for markets over the coming months, for which our portfolios are currently positioned.
78% Probability
Markets remain cautiously optimistic—supported by resilient global earnings, fiscal stimulus, and strong liquidity—though elevated volatility is expected in the short term, driven by tariff risks, inflation dynamics, geopolitical shifts, and seasonal patterns. This could be further accentuated following a strong run up in equity prices already this year.
Our forecast for subdued inflation in the first half of 2025 has proven accurate. Nevertheless, global inflation—excluding China—is likely to remain elevated compared to the past decade. This uncertain trajectory may spark further volatility later in the year, particularly if the effects of tariffs begin to show up in global inflation data.
The US administration’s recent tariff announcements have heightened downside risks to our baseline forecast, as they create headwinds for global growth and market sentiment. On the other hand, the “One Big Beautiful Bill”—a sweeping tax and spending package in the US—appears more stimulatory than initially anticipated, particularly when paired with deregulation efforts. Together, these developments support a constructive medium term outlook for economic activity, though elevated government deficit risks remain a concern.
Central banks—especially the US Federal Reserve—face a delicate balancing act. Easing supports growth and stability but risks weaker currencies and higher yields; tightening curbs inflation but threatens contraction and strains financial systems. In the US, the Federal Reserve cut the cash rate by 25 basis points in September. This is consistent with many major central banks globally, who are also in a rate cycle. We generally expect such a trend to be supportive of economic expansion and valuations over the medium-term.
We remain flexible in our positioning—able to pivot defensively and hold cash reserves to seize market dislocations. Though global liquidity has grown unevenly, this provides some reassurance and remains a key factor underpinning our constructive stance on risk assets. With strong demand for both new and rollover debt expected through the rest of 2025 and into 2026, continued liquidity support is essential to sustaining our positive outlook.
We remain constructive on global economic activity and risk assets—especially inflation hedges like precious metals—but our baseline case faces greater risks if U.S. tariffs are fully implemented or if significant liquidity support from the People’s Bank of China or the U.S. Federal Reserve fails to materialise in the short-term.
We expect additional liquidity injections in the coming months, offering medium-term support to financial markets. Although short-term volatility may persist, this supportive liquidity backdrop should remain favourable for risk assets through year-end. Structural growth themes—particularly AI infrastructure and expanding energy infrastructure—are likely to bolster equity markets. At the same time, globally lower interest rates and continued fiscal stimulus should broaden earnings growth across sectors.
This environment supports a pro growth, medium term bias toward risk assets, accepting elevated volatility as opportunity. On pullbacks, we will increase exposure to sectors tied to economic and structural growth. Our asset allocation remains tilted toward growth, guided by macro developments, valuations, and central bank policy.
Bear Case
Our worst-case scenario for the coming months, which we are prepared to position for should conditions deteriorate.
8% Probability
Global consumer demand weakens more than anticipated, with the U.S. economy showing signs of slowing and limited recovery elsewhere. If U.S. tariff policies prove more aggressive and enduring than expected, inflationary pressures could rise, potentially reversing the recent global trend toward interest rate cuts. Such developments will likely lead to corporate earnings downgrades, with the chance of a technical recession in either of Europe, the US and Australia some chance. In such a situation significant downside to risk assets is likely as current valuations are historically rich.
A resurgence of banking sector stresses, akin to those observed in March 2023, driven by credit market volatility, could tighten lending standards further. Rising concerns over sovereign debt sustainability may prompt bond markets to demand higher yield premiums, exacerbating financial stress. Any stall or decline in global liquidity growth would compound these pressures, potentially weakening currently robust employment conditions.
Further geopolitical instability may disrupt supply chains and energy markets, intensifying inflationary pressures and forcing central banks to maintain tight monetary policies. Simultaneously, rising wage demands, and housing costs may become embedded, further pressuring corporate margins as input and debt servicing costs rise amid softening demand.
This confluence of tightening financial conditions and elevated inflation could compel central banks to maintain or increase interest rates even as economic activity deteriorates. A premature withdrawal of central bank liquidity could destabilise financial markets, which have come to rely heavily on such support. Coupled with more constrained government spending than currently anticipated, due to elevated debt levels, this would likely erode consumer confidence and spending, especially in the absence of strong wage growth. Such a scenario would see a deterioration of corporate and household balance sheets from their current healthy situation.
In China, continued fragility in the property sector raises the risk of a deflationary debt spiral. If recent stimulus measures fail to support consumer confidence and property prices, high debt burdens may continue to suppress growth. Such a scenario would have negative implications for Australia, given its reliance on natural resource exports to China.
A sudden escalation in geopolitical tensions or a major credit event stemming from excessive leverage in a rising yield environment could trigger a rapid and widespread sell-off in risk assets. In this case, we would move decisively into defensive positioning, prioritising capital preservation through elevated cash holdings and reduced equity exposure. Renewed stress in systemically important global banks could also trigger liquidity events with materially negative effects on global growth.
Should these risks materialise, we would adopt a more defensive strategy, rotating away from equities and into cash and defensive sectors. In a scenario of rapidly rising bond yields, a more selective approach would be required, focusing on companies and industries best positioned to benefit from such a shift. Defensive allocations would likely include increased exposure to healthcare, consumer staples, and utilities, alongside elevated cash reserves.
Bull case
Our most optimistic view for markets over the coming months.
14% Probability
In a more favourable scenario, developed economies exceed current growth expectations as policy clarity improves. Easing supply chain constraints, stronger labour market dynamics, and rising productivity help drive down inflationary pressures. Diplomatic progress shortens and reduces the impact of trade tariffs, and regional geopolitical conflicts remain contained. Additionally, corporate productivity is boosted by faster deployment of technology advances (with “Agentic AI” as one example). This scenario would further improve global economic growth prospects and provide upside to consensus potential for corporate earnings.
Lower input costs and rising demand are driving robust corporate earnings growth. Profit margins remain elevated or are improving, fuelled by the adoption of new technologies like artificial intelligence, which enhance labour efficiency and boost profitability.
Governments are moving away from fiscal austerity by increasing spending, which is accelerating economic growth. Although this may introduce some inflationary pressures, nominal growth is expected to outpace inflation, creating a favourable environment for risk assets. This acceleration is supported by deregulation and fiscal stimulus measures.
In Australia, increased government spending and recent interest rate cuts are supporting domestic economic growth. While global economic recovery remains fragile, coordinated stimulus measures—such as China’s new economic stimulus package —and healthy household and corporate balance sheets are contributing to a significant acceleration in recovery. Prudent use of increased leverage amongst households and corporates further amplifies this trend.
If central banks resume efforts to keep interest rates below inflation and enhance liquidity support, financial markets could experience a renewed uptrend. Such conditions would likely stimulate further demand for growth assets in a low or negative real rate environment.
We will maintain a growth-focused asset allocation with minimal cash holdings. If leading indicators begin to show positive surprises, we will likely increase exposure to cyclical sectors more sensitive to economic growth.
Stock in Focus – Xero Limited
Investment Thesis
Xero Limited (XRO) is a global industry leading provider of cloud-based accounting services for the growing SME market. Specialising in cloud-based accounting software, providing an ecosystem of different solutions such as payroll, invoicing, and payments.
It has been a great success story starting New Zealand and Australia 20 years ago where it now dominates its markets before expanding offshore to the UK and other countries where it is having similar success. Its recent foray into the United States is also gaining traction and represents a huge opportunity for the company considering the size of the North American market.
The XRO share price has fallen around 20% from all-time highs the past few months following a capital raise and company acquisition. XRO has been on our watchlist for a while, and we initiated a small portfolio position in September.
History
Xero Limited was incorporated in 2006 and is headquartered in Wellington, New Zealand. Today the company has major business operations in New Zealand, Australia, U.K. and the U.S. Today, the company is valued at ~AUD$26 Billion.
Xero Limited, together with its subsidiaries, provides online business solutions for small businesses and their advisors in Australia, New Zealand, the United Kingdom, North America, and internationally. It offers accounting, payroll, payments and other solutions through its Xero platform. The company also provides Planday, an online employee scheduling software; Hubdoc for bills and receipts; Syft, which creates reports, forecasts, dashboards, and consolidations with AI insights; TaxCycle, a tax preparation software for accountants and bookkeepers; and Tickstar, an e-invoicing product.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.
Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.
