Australia's financial markets enter 2027 searching for certainty

As the market looks ahead to 2027, the question remains whether this uncertainty begins to ease or if investors, lenders and borrowers face another year of challenging conditions.

The first half of 2026 was dominated by refinancing activity as borrowers sought to lock in favourable funding terms before market conditions became more challenging. Asian term loan markets were particularly active as borrowers took advantage of strong liquidity and attractive pricing from regional lenders.

Many businesses also increased hedging activity, anticipating higher borrowing costs and potential market disruption later in the year. This approach proved well timed.

One of the year's biggest tests came when conflict involving the US, Israel and Iran destabilised global capital markets, although Australia's debt markets proved relatively resilient. Issuance under Australian medium-term note (AMTN) programmes continued, demonstrating the depth of domestic capital markets and ongoing investor demand for quality debt assets.

Not every borrower was willing to test market appetite, however. Some issuers opted to rely more heavily on bank debt facilities, preferring the flexibility to wait for clearer market conditions before accessing debt capital markets. That shift reflected a broader trend seen throughout 2026, where some borrowers increasingly prioritised flexibility over tenor.

The decline of the US private placement (USPP) market as a meaningful source of funding for Australian corporates continued during the year. Once seen as an attractive alternative to syndicated loans and public bonds, USPP issuance has largely faded as investor preferences and funding conditions have evolved.

Questions have also emerged around the future of sustainability-linked debt products globally. While sustainability-linked loans and bonds remain important parts of the market, investors in this market are applying greater scrutiny to performance targets, reporting obligations and the credibility of sustainability claims. At the same time, some issuers are questioning the need to issue sustainability-linked debt products at all given global shifts in political sentiment meaning the market for debt products that are not sustainability-linked remains well and truly open.

Property markets face further pressure

Higher interest rates and changes to tax settings included in the May federal budget have become an increasingly significant headwind across Australian property markets.

Commercial real estate values have already adjusted across many sectors and signs of weakness are now emerging in residential markets. Historically, residential property tends to lag commercial property cycles, raising the prospect of further valuation pressure ahead.

For lenders and investors, this challenge extends beyond asset prices. Rising costs and changing revenue assumptions are affecting many businesses, but those pressures are not always immediately visible in financial statements. As a result, forecasting future performance has become more difficult for potential buyers and lenders alike, particularly in sectors experiencing structural change.

That uncertainty is contributing to slower merger and acquisition activity as buyers and sellers wait for greater confidence around asset values.

This is now further compounded with a looming liquidity shortage in the private credit market, as private credit funds face investor redemption demand, distressed and defaulting loans and ASIC scrutiny.

Private credit remains under scrutiny

Private credit remained one of the most closely watched parts of Australia's financial markets in 2026.

Regulatory scrutiny intensified, particularly following issues associated with the Bathla Group collapse. The scrutiny has focused on transparency, valuation practices and governance standards, while some funds have faced distribution challenges and removal from investment platforms.

The story throughout 2026, however, has not been entirely negative. Higher-quality private credit managers have continued to attract capital, supported by investor demand for yield and relatively defensive return profiles. At the same time, an increase in defaults has tested the sector's ability to manage distressed positions.

For some established managers, that test has largely been passed so far. For those managers, workout and restructuring processes are proving effective, suggesting parts of the market are demonstrating resilience rather than weakness as credit conditions tighten.  On the other hand, those managers with less experience and less well-established internal structures and processes are facing significant challenges, bringing the potential for consolidation in this market in 2027.

Data centres attract growing attention

Few sectors attracted as much capital or attention during 2026 as data centres. Driven by artificial intelligence, cloud computing and rising digital infrastructure demand, investors and lenders competed aggressively to participate in the sector.

The enthusiasm echoes Australia's renewable energy boom. In the early years of that market, capital was abundant and funding was relatively easy to secure. As the sector matured, however, lenders and investors became more selective, scrutinising business models, counterparties, execution risks and long-term economics more closely.

A similar evolution may now be emerging for data centres. While funding remains available, lenders are increasingly examining the fundamentals of each project, including customer demand, community support, power supply, operating performance and long-term revenue assumptions. Community support is by no means certain, as fallout from the US election and change in US sentiment towards big tech and data centres potentially flows to Australia.  As in renewables, larger and more established operators are likely to remain attractive, while smaller developers may find access to capital becomes more challenging.  

Outlook for 2027

The defining theme of 2026 has been uncertainty. Geopolitical tensions, weak productivity growth, persistent inflationary pressures, tax changes and higher interest rates have complicated investment decisions across multiple sectors. The resulting uncertainty around valuations has contributed to slower merger and acquisition activity and more cautious lending behaviour.

In 2027, whether markets gain confidence that asset values have reached their floor is a major question. If property values, infrastructure assets and corporate earnings begin to stabilise, potentially off the back of interest rate cuts, transaction activity could recover quickly. Capital remains available, debt markets remain open and investors, especially offshore investors and lenders looking to invest in Australia, continue to hold significant amounts of uncommitted capital.

However, if inflation remains stubborn, interest rates continue to rise and geopolitical tensions persist, the coming year may look much like the one just passed, with selective financing, cautious investment decisions and greater scrutiny of business fundamentals.  These challenges will be further exacerbated compared to 2026 if private credit is unable to meet the funding needs of the Australian borrower market that it has swept into during the last decade.

For now, Australia's financial markets remain active. The difference compared with previous years is that capital is becoming increasingly selective and, in the private credit market, less available, demanding clearer evidence that assets, earnings and business models can withstand a more challenging economic environment.