We have continued to enjoy largely positive results with equity markets overall despite increased volatility and political uncertainties globally.
Positivity seems to be the state of play despite many alarming factors, such as the wars waging in Europe and the Middle East; shift away from the norm in most Western nations politically; and ever-increasing equity market valuations. Couple this with Trump mania and the continued slump in China, we remain focused on fundamentals and looking towards very specific exposures across both regions as well as asset classes and also within market sectors. It is now time to be selective and not passive in our view.
Even though Generative AI has not created streams of income for many of the technology companies developing it, it has driven significant capital investment by these companies and investors as they prepare for what they expect to be widespread adoption. In the US, employment and capital spending has remained strong, offering a backdrop for the continued strength in equity markets.
Interestingly, inflation numbers have been heading in the right direction providing the Federal Reserve with some room to start reducing interest rates. The US market has priced in at least 2 rate cuts for the remainder of this calendar year. This has provided a tail wind to the equity markets, especially tech. Whilst, as stated at the onset, valuations appear stretched in some of these pockets such as tech and growth sectors, there are still opportunities across small caps and more value stocks.
Off course, a major distraction and cause for concern (and hence the recent volatility in markets) is the US elections. Whilst both sides of politics have their pros and cons, a Trump Presidency is likely to be more inflationary (lowering taxes, etc.) and antagonist in regard to trade pacts and tariffs.
In Australia, whilst inflation has been abating as of late, the most likely scenario (and is our base case) is that interest rates are likely to remain elevated until the first quarter of next year notwithstanding an ‘X’ factor such as an increase in hostilities across the Middle East and a significant slump in GDP and employment.
The slowing economy in China, still our largest trading partner, has kept our economy somewhat subdued. Iron ore demand is also slowing, and the cost-of-living pressures are now eating into spending and hence GDP. The latest GDP numbers were barely positive and have started to look like a slow crawl.
The Big Four Banks and a handful of other stocks such as Wesfarmers and Goodman have driven our positive market returns. The banks, on historical standards, are trading at lofty valuations largely due to low to no bad debts and increasing profit margins. The tail winds are no longer blowing, in our view, and a sector rotation might be prudent. Whilst China has been slowing, resources still look attractive on valuations as demand for things like copper, rare earths, etc., based on the huge demand for data centres requiring an ever-increasing need for electricity generation is a net positive. Our aging population and a move back to normality post the covid restrictions is also a positive for some healthcare exposures as well other related sectors.
Diversification across regions as well as assets is once again adding value and increasingly important to maintain sustainability of returns over the longer term. The World Economic outlook for 2025 is illustrated below:
The baseline forecast from the International Monetary Fund (IMF) is for the world economy to continue growing at 3.2 percent during 2024 and 2025, at the same pace as in 2023. Therefore, it is slow but steady growth.
Similarly, according to KPMG’s Benjamin Shoesmith, Senior Economist, prospects globally for 2025 are better, with inflation expected to return towards target as central banks gain confidence to cut policy rates from the current restrictive levels. Mergers and acquisitions activity could also pick up, as financial conditions ease and the significant cash on the sidelines is deployed. However, uncertainties remain given the shift politically towards more insular and protectionist policies (especially if Trump gets in).
We remain of the view that markets, despite the continued volatility, will remain positive in 2025. The principles around diversification and taking a selective investment approach will add value by mitigating some of the current imbedded risks in markets and potentially enhancing overall returns.
“Erratic markets are ideal for any investor — small or large — so long as he sticks to his investment knitting. Volatility caused by money managers who speculate irrationally with huge sums will offer the true investor more chances to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times.” —Warren Buffet
“Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” Seth Klarman
Therefore, stay the course, enjoy your life, and don’t worry!