Macro Perspective - Despite global risks such as geopolitical tensions and potential economic recession, the severity of these risks is expected to be relatively low by 2026. Traditional valuation metrics show no strong evidence of bubbles in credit and equity markets [3][4] - Global financial conditions have steadily improved since the tariff increases in April 2025, with central banks indicating they do not intend to reduce balance sheets to pre-crisis levels, which helps mitigate financial stability risks [3] - Inflation remains above some central banks' targets, but there is little evidence suggesting a return to high inflation. If unemployment rises quickly in 2026, the Federal Reserve has room for further easing [3][4] Equity Market Outlook - The fundamentals for equities remain strong, supported by robust earnings performance, near-historical profit margins, and strong consumer demand. The "Magnificent-7" companies are expected to expand their earnings further [4][6] - The key risk in the equity market is investor patience regarding returns from artificial intelligence investments, as current valuations are close to levels seen during the internet bubble [6][7] Retail Consumer Sector - The LSEG retail/restaurant index predicts moderate growth in 2025, with revenue expected to increase by 5.9% and earnings by 4.6%, driven by strong consumer demand. Growth momentum is expected to accelerate in 2026, with earnings projected to grow by 10.9% and revenue by 5.8% [9] Fund Flows - In 2025, U.S. dollar money market funds dominated fund flows, driven by high interest rates from the Federal Reserve, maintaining yields above 4% to 5%. This attracted both U.S. and non-U.S. investors [12] - Exchange-traded funds (ETFs) led stock market inflows, totaling $502 billion, while U.S. equity funds saw a significant drop in inflows compared to the previous year [12] Agency Mortgage-Backed Securities (MBS) - The agency MBS market is expected to remain stable in 2026 due to steady issuance, moderate home price growth, and potential declines in mortgage rates. Recent policy measures may impact affordability and liquidity, but their effects remain uncertain [15] - The non-agency MBS market had a strong year in 2025, with issuance up 42% from 2024, driven by increased demand in the non-qualified mortgage sector [17][18] Commercial Mortgage-Backed Securities (CMBS) - The institutional CMBS market performed strongly in 2025, with issuance up over 34%, supported by lower interest rates and a favorable financing environment. However, the multifamily sector showed signs of weakness with rising vacancy rates [20] - The non-institutional CMBS market achieved record issuance levels despite complex macroeconomic conditions, indicating a recovery in commercial real estate fundamentals [21]

Group 1 - The overall outlook for the structured finance market in Australia and New Zealand is "neutral to improving" by 2026, with New Zealand's market showing a more positive outlook [1] - In Australia, the performance outlook for Residential Mortgage-Backed Securities (RMBS) and Asset-Backed Securities (ABS) is "neutral" [1] - Factors such as stable policy interest rates, easing inflation, and improved household income are expected to help maintain low delinquency rates for RMBS [1] Group 2 - It is projected that national house prices in Australia will increase by 3% to 5% by 2026, further solidifying the quality of RMBS underlying assets [1] - The outlook for New Zealand's structured finance market has been upgraded to "improving," driven by a downward trend in policy interest rates and a decrease in actual mortgage rates [1] - The overall economic recovery and low unemployment rates in New Zealand are expected to enhance borrowers' repayment capabilities [1]

Core Viewpoint - The global market is showing cautious optimism in the first half of 2025, rebounding from tariffs, interest rate uncertainties, and debt concerns, with stocks, bonds, and commercial real estate (CRE) sectors demonstrating resilience [5][6]. Group 1: Macroeconomic Themes - De-globalization, monetary policy divergence, and debt sustainability are the three dominant themes in the global macroeconomic landscape [6][8]. - Concerns over tariffs and trade tensions have highlighted the trend of de-globalization, with initial fears easing as the year progressed [6][8]. - The debt-to-GDP ratio in the US and UK has surpassed 100%, raising concerns about government debt sustainability and leading to a steeper yield curve [6][8]. Group 2: Market Performance - After a sharp sell-off in the first quarter due to tariff announcements, the stock market experienced a V-shaped recovery, with the S&P 500 showing strong earnings performance [8][10]. - Global market earnings revisions appear to have bottomed out, indicating a potential turning point as earnings expectations remain resilient [10]. - The retail sector saw a decline in earnings growth, with a projected -1.7% in the second quarter, marking the first negative growth since the pandemic [14]. Group 3: Real Estate and Mortgage-Backed Securities - The institutional residential mortgage-backed securities (RMBS) market showed resilience due to stable new issuance and improving market sentiment [16]. - Housing activity has slightly rebounded, supported by increased inventory and builder incentives, helping to offset affordability pressures [16]. - The outlook for commercial real estate (CRE) and commercial mortgage-backed securities (CMBS) issuance is expected to improve, with refinancing volumes anticipated to rise due to expected Fed rate cuts [8][19]. Group 4: Credit Market Outlook - Expectations of Fed rate cuts later in the year are providing new momentum for the collateralized loan obligation (CLO) market, with revised forecasts for refinancing and reset issuance [19]. - The overall credit fundamentals for CLOs are expected to remain stable, with a slowdown in rating downgrades anticipated by year-end [19]. - The projected issuance for BSL new AAA and BB rated bonds is expected to narrow to 125 basis points and 500 basis points, respectively, by year-end [19].