Inveresk FY26 Review Letter

For those following along, FY2026 was a Henny Penny year, with cries of “the sky is falling down!” every other month. The acorns hit differently, depending on the month, but a steady stream of crises were supposed to have ended things by now.

Trump’s tariffs, AI taking over the world, mass unemployment, the Iran War, oil shock, inflation, and property market bubbles. Sometime earlier this year, rumour had it that Australia was about to run out of fuel, farmers wouldn’t be able to run their tractors, and we weren’t going to have anything to eat. Yikes!

Yet somehow, none of that happened, and the global share market indexes finished the year in the green.

World Share Market Index returns for FY26:

-          Australian share market: 6%

-          MSCI World Index: 19%

-          US S&P500: 22%

-          Korean share market: 100%!

One promise is bursting through Trump’s blockade of Hormuz: that AI is going to unleash an unprecedented productivity boom.  

Elon Musk opines that GDP is going to 10x over the next 10 years. Jensen Huang, CEO of Nvidia, says that Agentic AI and Physical AI open up a $100T market previously untapped. He likens it to the next industrial revolution.

We’re even seeing it here at the bottom of the world in Launceston, Tasmania, with Firmus building an AI Factory on the edge of town with billions of dollars committed by investors like Nvidia, and an A+ customer list. Things are moving very fast.   

Looking under the bonnet

Under the headline figures, financial conditions are more mixed. If you remove the Magnificent 7 from the S&P500, the return drops from 22% to around 10%. If you remove BHP from the ASX200, the return drops from 6% to 1%. If you remove the Korean AI stocks (Samsung, SK Hynix) from the index, the return drops from 100% to around 25%. A lot of the growth we have seen in the last year has been concentrated in some of the biggest companies in each index.

This has been great news for index investors, who continue buying more of these companies as they take a larger share of the global indexes. It has been harder for active fund managers and investors who have tried to take a more selective approach.

An Australian Perspective

Australia has had its own unique challenges this financial year. Inflation has been above the RBA’s target band at 4%, and the RBA has had to hike interest rates three times while the USA and Europe have been cutting rates.

Added to that, the recent Federal Budget has raised taxes on investment, removing the 50% Capital Gains Tax (CGT) discount and limiting negative gearing on existing properties. Impacts are already being seen in the property market, with house prices beginning to fall in Sydney and Melbourne, and auction clearance rates at very low levels.

Small and medium businesses have been doing it tough, with FY25 reporting the highest level of insolvencies on record (14,722), and FY26 looking like it will come in at a similar level.

Healthcare and Technology stocks also had a tough innings, with both sectors losing roughly 37% of their market capitalisation throughout the year. Quality growth stocks like CSL, WiseTech, and Xero were heavily sold off on fears that AI would disrupt their business models and fears of declining earnings.

The saving grace of Australian economy has been the materials sectors this year, rising approximately 47%. Standout performances were delivered by BHP rising 62%, RIO up 63%, and Woodside doing some heavy lifting during the oil crisis (up almost 20%).

In a time of great opportunity, but with significant productivity and investment challenges, it is disappointing that the federal government seems more focused on class warfare than encouraging innovation and growth.

Takeaways and thoughts for FY27

It feels strange to say FY27, but here we are, the future is already here. I think the main question the market will be weighing this year is, “what is the return on investment from all our AI spending?”.

Investors will be asking this question when they value the hyper-scalers. Customers will be asking this question as they burn through their AI tokens. Launceston residents will be asking this question as they enjoy the calming buzz of the St Leonard’s AI Factory.

There are risks emerging in global markets, increasingly concentrated in high-conviction AI bets, that the answer is either unclear or underwhelming. Around 25% of the global index sits in AI stocks, and these are trading at an elevated 30x earnings (higher if you include Tesla).

If the market feels that the returns on investment are either not as high as promised, or further into the future, or overly limited by energy constraints and government regulation, then some of the valuations in the market will need to come down.

Having said that, the promise of AI is massive, and it doesn’t pay to put your head in the sand. Owning some shares in the world’s biggest companies, attracting the best talent, and solving problems on the frontier of technology is sensible. But it all comes back to the questions: How much? Which ones? How do they contribute towards my specific goals and circumstances? This is becoming increasingly important as they continue to attract capital and take up a greater share of global markets.

Broad narratives about AI taking over the world, mass unemployment, and the creation of a permanent underclass, seem unlikely outcomes (just like Australia running out of diesel, no food, panic!). Prices adapt to technology, and profits accrue to people and companies creating value. Profits don’t accrue to lines of software code.   

The ending of the Henny Penny story tends to be instructive for long-term investors. Heny Penny’s panicked squawks of “the sky is falling down!”, when really she has been hit on the head by a falling acorn, attracts a conga-line of believers who eventually get eaten by the fox. There will be bumps along the way, but the sky hasn’t fallen in yet, and doesn’t look likely to in the foreseeable future.

Further reading:

Nvidia's Jensen Huang on AI & the Next Frontier of Growth - Citadel Securities

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