Australia's Resilient Services and Construction Sectors Drive Business Confidence Surge in July

In July 2025, Australia's business confidence index surged to a three-year high of +7, driven by robust performance in the services and construction sectors. This upturn, captured in the National Australia Bank (NAB) Business Survey and Roy Morgan data, underscores a strategic shift in emerging markets (EM) where sector rotation is increasingly favoring resilient industries amid inflationary pressures and policy uncertainty. For investors, this presents a compelling case to reevaluate allocations in Australia's services and construction sectors, which are outpacing peers in EM markets grappling with trade disruptions and divergent monetary policies.

A Global Context: Sector Rotation in EM Amid Policy Divergence

Emerging markets in 2025 face a fragmented landscape. While inflation is moderating in some regions, others, like China, are bracing for slower growth (projected at 3.9% in 2025) due to U.S. tariff policies and domestic structural challenges. J.P. Morgan Research notes that EM growth is expected to decelerate to 2.4% annually in the second half of 2025, with central banks prioritizing rate cuts to stimulate activity. This divergence creates a fertile ground for sector rotation, favoring industries with strong domestic demand and pricing power.

In this context, Australia's services and construction sectors stand out. Unlike capital-intensive industries in EMs—such as manufacturing or mining—these sectors are insulated from global trade shocks and benefit from localized demand. For instance, while construction in other EMs faces headwinds from rising tariffs and currency depreciation, Australia's infrastructure projects, including the Sydney to Newcastle High-Speed Rail and renewable energy zones, are attracting both public and private investment.

Services Sector: A Pillar of Resilience

The services sector, particularly consumer-facing and business-oriented services, has been a key driver of Australia's confidence surge. The NAB survey highlights that business sales in services rose to +11 in July, reflecting strong retail and hospitality demand. This resilience is underpinned by Australia's unique demographic and economic structure: a high proportion of service-based employment, a stable labor market (despite a slight employment index drop to +1), and a tourism rebound post-pandemic.

Globally, services sectors in EMs are often volatile due to currency fluctuations and trade dependencies. However, Australia's services industry benefits from a robust domestic consumer base and a managed immigration policy that supports labor supply. For investors, this contrasts sharply with EMs like India or Brazil, where services growth is more cyclical and vulnerable to external shocks.

Construction: A Strategic Bet Amid Policy Tailwinds

Australia's construction sector is another standout, with the NAB reporting a 9.9-point confidence boost in Western Australia and 8.5 points in Queensland. This growth is fueled by government-led infrastructure spending, including the National Housing Accord and the Housing Australia Future Fund, which aim to address housing shortages and stimulate economic activity.

In contrast, construction in other EMs is struggling. J.P. Morgan notes that capital-intensive sectors in EMs are facing reduced investment due to inflationary pressures and trade policy uncertainty. For example, China's construction sector is contracting as property developers grapple with liquidity crises, while India's infrastructure projects are delayed by regulatory bottlenecks. Australia's construction industry, however, is insulated by its focus on public-private partnerships (PPPs) and a pipeline of long-term projects.

Inflationary Pressures and Policy Uncertainty: A Balancing Act

While Australia's services and construction sectors are thriving, they are not immune to global headwinds. Inflation remains a concern, with retail prices rising 1.1% in July and producer prices up 0.9%. However, the Reserve Bank of Australia (RBA) is expected to cut the cash rate by 25 basis points in late 2025, a “hawkish cut” aimed at supporting growth without reigniting inflation. This policy stance contrasts with EMs like Turkey or Argentina, where central banks are forced to hike rates aggressively to combat hyperinflation, stifling investment.

Investors should also consider regional disparities within Australia. While Western Australia and Queensland are leading the charge, South Australia and Victoria remain below the confidence threshold of 100. This highlights the importance of sector-specific allocations rather than broad regional bets.

Investment Implications: A Sector Rotation Playbook

For a strategic sector rotation in EM markets, Australia's services and construction sectors offer a dual advantage:
1. Resilience to Global Shocks: Unlike export-driven industries in other EMs, these sectors are insulated from trade policy volatility.
2. Policy Tailwinds: Government infrastructure spending and RBA easing create a supportive environment for long-term growth.

Investors should prioritize:
- Services ETFs: Focused on consumer-facing and business services, which benefit from Australia's stable domestic demand.
- Construction Stocks: Companies involved in infrastructure projects, such as those listed on the ASX 200, which are likely to outperform as public-private partnerships scale.
- Regional Diversification: Overweighting Western Australia and Queensland, where confidence levels are highest, while hedging against South Australia and Victoria's weaker outlook.

Conclusion: A Strategic Anchor in a Volatile EM Landscape

As emerging markets navigate a complex mix of inflation, trade policy shifts, and divergent monetary policies, Australia's services and construction sectors emerge as strategic anchors. Their resilience—driven by domestic demand, policy support, and a diversified project pipeline—positions them as ideal candidates for sector rotation. For investors seeking to hedge against global volatility while capitalizing on EM growth, Australia's services and construction industries offer a compelling, data-driven opportunity.

In a world where uncertainty is the norm, the key to success lies in identifying sectors that thrive amid the chaos—and Australia's services and construction sectors are proving to be just that.