Each December, an old habit returns – identifying the year’s X-Factor – the unexpected force that materially shapes investment outcomes.
The concept dates back to 1974, when I left the Reserve Bank to join Bain & Company. Soon after, Japanese life offices and pension funds began buying Australian bonds in significant volumes. At a lunch discussing these inflows, I referred to them as “Factor X” – later changed to X-Factor – to describe an influence that emerges unexpectedly and meaningfully shifts markets.
An X-Factor does not replace analysis of economic conditions, shares, interest rates, property, or currencies. Rather, it highlights the reality that markets are often driven by surprise developments. Recognising these early can enhance returns, although sound diversification and prudent risk management – particularly in retirement – remain essential.
Past X-Factors
Positive surprises have included:
- the floating of the Australian dollar in 1983;
- Paul Keating’s 1986 “banana republic” warning, which helped drive fiscal reform;
- the sustained collapse of inflation from 1991;
- Australia’s resilience during the 2008 global financial crisis due to strong Chinese demand;
- the equity market rebound from 2009;
- the post-Covid market recovery; and
- the powerful rally in US technology stocks from 2023 to 2025.
Negative shocks have included:
- the 1994 bond yield surge;
- the Asian financial crisis;
- the September 2001 terrorist attacks;
- the collapse of Enron;
- the near-meltdown of global finance in 2008;
- Covid-19; and
- today’s heightened geopolitical risks – arguably the most severe since World War II.
Recent Experience
My X-Factor selections were largely uncontroversial until 2021, when I argued that the long-standing belief in permanently low inflation was fracturing. In subsequent reports on Factor-X in this publication I projected inflation rising to 4-5%, a view that proved broadly correct.
Finalists for the 2025 X-Factor
Key contenders include:
- economic disruption from President Trump’s tariff policies;
- the risk that US inflation exceeds current expectations, driven by large fiscal deficits and rapid money growth;
- Australia’s inflation outlook, which could see price increases over 2026 at about the current level of the cash rate given accelerating money supply, strong wage growth, increased government spending, and global inflation spillovers;
- concerns about valuations of US technology and AI-related stocks;
- record-high gold prices as an inflation hedge; and
- the rapid escalation of geopolitical risks – despite risk assets ending the year near record highs.
(Productivity stagnation remains a major issue but is too long-running to qualify as this year’s X-Factor.)
And the winner Is …
The rules have changed. There is no single X-Factor for 2025. Instead, it is the combination of two forces:
- the growing likelihood that many countries, including Australia will require tighter monetary policy to offset the impact huge budget deficits will have on generating inflation;
- the uneasy coexistence of elevated geopolitical risks with asset prices near historic highs.
Don Stammer has been involved in investing for more than six decades as an academic, senior official of the Reserve Bank, an investment banker, the chairman of nine companies listed on the ASX, and a columnist for The Australian and Business Review Weekly.
In recent months, Don has joined with Ashley Owen and Shani Jayamanne in setting up the Dr Don Academy, which aims to provide guidance – to young investors particularly –by drawing on the three founders’ combined investment experience of 124 years.
This article is general information only and does not consider the circumstances of any investor.
44 years of the X-Factor file
2025 The likelihood that many countries will need tighter monetary policy and the uneasy coexistence of heightened geopolitical risks with asset prices near historic highs
2024 The US economy is in its sixth year without experiencing recession, despite the many and frequent predictions of a deep and imminent economic downturn
2023 The surge in share prices of US tech stocks, and the better understanding of how they should be valued
2022 High inflation, tighter monetary policies, and sharp rises in interest rates
2021 The fracturing of the long-dominant view low inflation is here to stay
2020 Covid-19
2019 Strong share markets despite repeated predictions of global recession
2018 The impact from the royal commission on financial services
2017 The positive macro influences that, globally, restrained volatility, boosted shares and kept bond yields low
2016 Election of Donald Trump as US president
2015 Widespread experience of negative nominal interest rates
2014 Collapse in oil price during severe tensions in middle east
2013 Confusion on US central bank’s “taper” of bond purchases
2012 The extent of investors’ hunt for yield
2011 The government debt crises in Europe
2010 The government debt crises in Europe
2009 The resilience of our economy despite the GFC
2008 The near-meltdown in banking systems
2007 RBA raises interest rates 17 days pre-election
2006 Big changes to superannuation
2005 Modest impact on economies from high oil prices
2004 Sustained hike in oil prices
2003 Marked fall in US dollar
2002 Extent of US corporate fraud in Enron etc
2001 September 11 terrorist attacks
2000 Overshooting of exchange rates
1999 Powerful cyclical recovery across Asia
1998 Resilience of our economy despite Asian crisis
1997 Asian financial crisis
1996 Global liquidity boom created in Japan
1995 Powerful rally in US markets
1994 Sharp rise in bond yields
1993 Big improvement in Australian competitiveness
1992 Souring of the vision of “Europe 1992”
1991 Sustainable collapse of inflation1990 Iraq invasion of Kuwait
1989 Collapse of communism
1988 Boom in world economy despite Black Monday
1987 Black Monday collapse in shares
1986 “Banana Republic” comment by Paul Keating
1985 Collapse of A$ after MX missile crisis
1984 Measured inflation falls sharply
1983 Free float of Australian dollar
1982 Substantial Japanese buying of Australian bonds