Investors urged to resist allure of “overvalued territory”: Schroders

Yasmine Raso

Senior Journalist, Financial Newswire

18 July 2025

Investors are being urged to not turn a blind eye to the impacts of geopolitical tensions and economic volatility on investments, as markets grapple with inflated valuations and policy pressures.

This is the latest sentiment featured in the mid-year outlook from investment manager, Schroders, as global markets continue to defy expectations of a slump amid “trade tensions, inflation divergence and geopolitical uncertainty”.

Sebastian Mullins, Head of Multi-Asset & Fixed Income at Schroders, said temporary ceasefires and trade agreements do little to assuage concerns over persistent “structural issues”.

“Sluggish global growth, fiscal stimulus without productivity reform, and an embattled US Federal Reserve all contribute to a highly uncertain outlook,” he said.

“Inflation remains contained for now, but the potential for fiscal-driven yield curve steepening is growing, particularly in the US.

“Markets are no longer reacting sharply to geopolitical developments, they’re fatigued. This leaves us uncomfortably neutral across all asset classes, as valuations remained stretched and expected returns remain muted.

“But the cycle remains intact, albeit uncomfortably slowing.”

Turning to Australia, Schroders’ mid-year outlook follows the recent Reserve Bank of Australia (RBA) monetary policy decision handed down last week which shocked markets and the industry alike with a hold.

Martin Conlon, Head of Australian Equities, said investors are awaiting the August reporting season to signal how the year ahead will pan out.

“Australia, like much of the developed world, is grappling with stagnating productivity growth and GDP per capita,” he said.

“Fiscal imbalances are obvious, with governments showing little intention of aligning spending with tax revenues. While equity markets benefit from their relative size and liquidity, bond markets become volatile.

“We’ve seen the gap between earnings yields and bond yields reach concerning levels – this reflects a market environment where asset prices are increasingly detached from economic reality.

“Asset prices continue to outpace wage growth, leading to increased wealth for asset owners and a widening divide with the rest of the population. The Australian economy is heavily leveraged, with property prices now four times the country’s GDP, raising concerns about affordability, resource misallocation, and long-term growth prospects.

“Lower interest rates are unlikely to stimulate productive investment, given capacity constraints in sectors like housing and infrastructure, and instead risk fuelling further asset price inflation.”

According to Helen Mason, portfolio manager at Schroders, Australian credit is backed by strong investor appetite, “solid corporate fundamentals” and a “favourable technical backdrop”.

“Corporate balance sheets are solid, with robust margins, especially among infrastructure and utility companies, which are favoured for transparent cash flows and low earnings volatility,” she said.

“Activity in the subordinated corporate space is increasing, with recent hybrid and Tier 2 issuances. Since March, Tier 2 paper has underperformed senior debt, with some spread widening due to supply in late May and early June, but this was largely retraced as supply diminished and geopolitical tensions rose.”

Conlon also noted investors have had to contend with a particularly “challenging environment”, balancing a focus on fundamentals with overextended valuations and ongoing market volatility.

“The Your Future Your Super regime and the rise of passive investing have redefined ‘risk’ as simply not holding enough of the largest index constituents, such as CBA. This has meant CBA being bought at ever-higher valuations, regardless of its fundamental value, exposing investors to almost certain loss,” he said.

“This distortion is not limited to CBA. The market’s obsession with businesses that employ minimal capital and promise rapid economic value creation, with little regard for business duration, is detached from economic reality and history. Companies have become skilled at offsetting current bad news with future optimism.

“The market’s fixation on revenue growth and momentum leaves opportunities in more mundane sectors, such as energy and materials, largely ignored, except for gold. We see abundant opportunity in these less fashionable corners of the market.

“We remain committed to a disciplined, risk-adjusted approach to value creation, even as market forces and policy settings make this increasingly uncomfortable. We will continue to seek out opportunities where the crowd is not looking, and to resist the pressure to follow the herd into overvalued territory.”