Our team has recently prepared this End of Year Wrap, reflecting on the market performance of 2024 and offering insights into the economic outlook for 2025.
Cash and Term Deposits
The Reserve Bank of Australia (RBA) maintained the official cash rate at 4.35% for the entire year. Headline inflation (2.8%) has fallen below the RBA’s target range of 2.0-3.0% but core inflation (3.5%) remains above the range and has prevented the RBA from easing rates in 2024. Core inflation is expected to retreat to 3.0% in 2025 and the RBA could begin to cut the official cash rate from February 2025. Fixed term deposit rates are already easing in anticipation of rate cuts ahead.
Australian Bonds and Bank Hybrids
Australian bond yields drifted below 4.0% for most of 2024 before a December quarter rally saw a rebound to the 4.5% level. Bond yields had been falling as G7 countries lowered cash rates, but a Trump election win in November 2024 raised concerns regarding tariffs (inflation) and lower taxes (US budget deficit). Rising bond yields lead to lower bond prices hence bond funds finished the year with modest returns around 3.0%.
Hybrid and subordinated debt funds had a strong year returning between 7.0-9.0% p.a., depending on franking credit levels. Cash reference rates remained relatively attractive for most of the year, while Bank profitability and capital ratios remained sound. In addition, news that APRA intends to phase out the $43bn Bank hybrid market by 2032 has added to the scarcity value of Bank hybrids. It is likely that Bank subordinated debt will replace Bank hybrids over the next 7 years.
Australian Property
Australian listed property produced a total return of 17.6% for the year. The sector continues to recover as economic activity remains reasonable and interest rates remain stable. Industrial and Retail continue to be the leading property sectors but there is hope for Office and Residential, if interest rates ease as expected in 2025. The listed property sector has been somewhat supported by the strong performance of Goodman Group (GMG), which now represents 39% of the property index but is viewed more as a growth stock than a traditional REIT. This means the traditional Vanguard property index has lost some yield and diversification benefits and we may consider switching to a more diversified index in 2025.
Australian Shares
Australian shares produced a solid return of 11.4% but continue to lag US equities by a fair margin. This is primarily because of a large bias to Resource & Energy stocks, which are currently struggling for earnings growth. Financials and Technology stocks dominated returns in 2024, despite Australian Banks currently generating low single-digit earnings growth. Resources remain in the doldrums on worries over China and US tariffs, but we wouldn’t be surprised to see China turnaround in 2025 and for the mooted US tariffs to be watered down. With an RBA interest rate easing cycle due in 2025, we expect a broadening in market performance (outside of Financials and Technology) and remain positive on the outlook for Australian Equities.
Global Shares (unhedged)
US equities continue to outperform most international markets with a total return of 36% over 2024 versus 17% for ex-US equities. Global shares (unhedged) returned 31%, with the US now representing a sizeable 75% of the global index. Financial and Technology stocks dominated returns in 2024, and one wonders whether the good times can continue into 2025. Clearly the US market is rallying on enthusiasm for Trump’s pro-US policies plus the Fed’s easing cycle but there are clear risks that inflation could make a comeback. One positive is that the US market doesn’t seem ridiculously priced trading on a 2025 P/E of 21.5x, considering market forecasts for 13-14% EPS growth. It could be that market breadth expands over the year, which should provide support for the overall market. Overall, we remain reasonably bullish on expectations of a global growth recovery, as interest rates ease, but US trade policy remains a clear risk ahead. Investors will also need to be conscious that the AUD/USD is currently at relatively low levels and that any rally could detract from unhedged returns, moving forward.
Global Infrastructure (hedged)
Global Infrastructure had a reasonable run during 2024, as global activity continues to recover from the COVID pandemic and interest rates eased. That said, a late rally in bond yields and the USD hurt performance in December with returns finishing around 12%. A reasonable result but still lagging property in the short to medium term.
Global wrap
Global shares (unhedged) had another strong year, led by US equities and weakness in the AUD/USD. The soft-landing scenario became clear during the year, as inflation and cash rates eased. Towards the end of the year, a Trump win in the US Presidential election only added to bullish sentiment towards US equities and the USD and negativity towards China and commodities.
However, the bond market is not quite as enthusiastic about a Trump Presidency which might bring risks to inflation (tariffs) and the US budget deficit (lower taxes). Bond yields rose towards 4.5%, meaning bond prices fell. This is leading to muted returns from bond funds.
The US Federal Reserve (the Fed) also seems to be stepping back from rate cuts with the Fed likely to hold the cash rate at 4.25-4.50% in the short term. The market expects the US cash rate to only move down a little to 4.0% during 2025.
Sentiment towards China is currently negative on worries over looming US tariffs on Chinese exports. However, the Chinese central government has been steadily rolling out internal stimulus and we wouldn’t be surprised to see the mooted tariffs on China watered down after negotiation. In the meantime, softer commodity prices are a positive for the inflation outlook but a negative for Australia and the AUD/USD. We expect China to outperform expectations during 2025 on internal stimulus and a general recovery in global activity, as cash rates ease.
Australian wrap
The economy slowed to less than 1% growth during 2024 but nonetheless remains positive. It seems that government spending is providing key support for the economy but could also be keeping core inflation relatively high.
The RBA has refused to cut the cash rate even though headline inflation has fallen to 2.8%, below the RBA’s 2.0-3.0% target range. Instead, it is focused on core inflation which at 3.5% is still too high for the RBA. The Federal government is becoming more desperate for rate cuts as a Federal election looms by May 2025.
The good news is that a set of monthly and quarterly inflation figures are due in January 2025, which should show inflation continuing to ease. If so, the RBA is a chance of beginning the easing cycle in its first meeting of the year in February 2025, or more likely the next meeting in April 2025.
Negative sentiment towards China has seen general weakness in commodities, which has led to Resource and Energy sectors underperforming. The positive is that weaker commodity prices should help inflation ease further and this is a positive for the broader market. And as mentioned above, we think China will outperform expectations as the year progresses. Accordingly, we see good value in Australian Resources at the moment.
The AUD/USD surprisingly fell 6 cents over the course of 2024, which mostly relates to strength in the USD, post the Trump election win. This was surprising because the RBA held interest rates steady during the year, while the Fed began to cut interest rates in the second half of 2024. We still view the AUD/USD as oversold at current levels and expect a recovery during 2025. Our view is that the RBA easing cycle is unlikely to lead to further weakness as this is already priced into cash and bond markets.
Outlook
The main issue for 2025 seems to be: what does a Trump Presidency mean for geopolitics, global trade, inflation and the US budget deficit? Many of the narratives sound negative but actual outcomes are hard to predict. In addition, an easing cycle underway in most major countries is a general positive for global growth. We think an easing in inflation and interest rates will generally outweigh any potential negatives from Trump’s policies but clearly a major risk is Trump’s policies having unintended consequences.
While the US equity market has had a strong rally over the past 2 years, market multiples don’t seem extreme and a broadening out of market performance (away from Financials and Technology) could support the market in 2025.
We see good value in Australian equities at the moment, with an RBA rate cut cycle due and potential for a recovery in Resources and Energy stocks. We remain positive on Australian Listed Property, especially if interest rates ease.
Cash and Term Deposits are likely to remain at current levels for the first part of 2025 and begin to ease from April/May 2025 onwards. Australian bonds are likely to remain volatile in the short term but should settle down as the US political situation becomes clearer.
Disclaimer:
Please note that this article provides general information only and does not take into account your individual objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances. You should also seek professional financial advice before acting on any of the information in this article.
