Key Points

• We have written previously about the notion of regime change, and its utility as a framework in which to make sense of the many changes taking place across economics, politics and ultimately, financial markets. In our view, these shifts are both significant and likely to endure.
• At the same time, the policy environment is changing too. Central banks are likely to face into both demand- and supply-side shocks in the new regime, which has different consequences for monetary policy. That this is occurring at the same time as central bank independence is being tested in some jurisdictions only amplifies the challenges.
• One important consequence of these changes relates to the stability and directional characteristics of cross asset correlations. Many fundamental assumptions that investors and risk managers have taken as constant appear to be changing as we transition into a new regime.
• In our view, this is consequential for both portfolio construction and risk management practices, and hence the topic of this note, jointly written with our colleagues in the JBWere & NAB Private Wealth CIO Office.
• For portfolio construction, the most significant changes relate to correlations between government bond and equity market performance and AUD/USD and US equity market performance. These changes are likely to force (for local investors) a reassessment of optimal USD growth asset exposure and hedging levels, as well as a consideration of new or “alternative” defensive assets.
• For other financial participants, there is much to absorb. At a minimum, the cost of hedging will rise, and scenario analysis will need to envisage a wider range of outcomes. A more de-synchronised global economy will influence cross market correlations and perceptions of both counterparty and sovereign risk.

For further details please see Economic and Financial Market Update (11 August 2025)