Markets have certainly continued their upward momentum post the US elections and a resounding win by President Elect Trump! The question now is will the US economy maintain this soft landing and what will be the repercussions for the globe based on Trump’s ethnocentric policies.
We have come out the other end of sharply increasing interest rates relatively unscathed over the past couple of years. Markets have been kind to those invested and continues to remain positive despite geopolitical issues still remaining elevated and unnerving, especially in the Middle East.
Wars over the past 3 years have caused severe disruptions to our supply chains and shipping routes, causing manufacturing delays and cost blowouts due to shortage of raw materials. Trump’s policies that are inward looking may cause further strive given his views on NATO and trade tariffs.
A loose immigration policy is generally good for growth and keep labour costs lower, but Trump is likely to clamp down on this. Shortage of labour and higher tariffs on trade globally could add to inflation pressures and potentially cause a reversal of Federal Reserve easing cycle in the US and beyond.
Current statistics point towards a soft landing in the US notwithstanding any shocks to the economy. A recession doesn’t happen in a vacuum, especially if momentum for growth is strong. However, an ensuing trade war, labour constriction, and increasing risk of inflation could be a trigger.
JP Morgan 2025 Markets Outlook Slides
Looking at the year almost gone by, US shares outperformed reflecting its stronger economy, huge tech exposure and euphoria around Trump’s “Make America Great Again” policies. On the other hand, non-US shares underperformed, particularly Eurozone shares given French political uncertainty. Chinese shares finally got a boost from more directed stimulus measures.
Australian shares did well in anticipation of stronger profits and rate cuts ahead but were held back due to China worries and no rate cut in sight for this year.
Australian home prices rose due to high demand and shortage of stock. However, higher rates and the likelihood of rates remaining elevated well into 2025 caused prices to fall in most capital cities towards the latter half.
Key Risks for 2025:
• Due to a stellar run in 2024, share valuations are less attractive given the higher PE’s, with the key US share market trading on a 26 times forward PE. Australia is less worrying at 20 times but still not cheap on a historic sense.
• Uncertainty remains around how much the Fed, the RBA and some other central banks will cut rates as core inflation is still not at target. This could be further exacerbated based on Trump policies on tariffs, immigration, etc.
• Bond yields could continue to rise on the back of Trump’s tax cuts and tariff policies (think trade wars), subduing the potential return on shares.
• Risks for the Chinese economy are high as Trump ramps up tariffs & if Chinese policy stimulus remains modest.
• Geopolitical risk remains high as tensions with China could escalate causing further pressure in our region of the world as well, especially given China is still our biggest trading partner.
• Trump is threatening to cease support for Ukraine and placing the onus on NATOs other members to foot the bill. He’s not happy about the US allocating $183 billion towards what he deems as a lost cause. This may lead to further instability in this region and potentially embolden Putin further.
• In Australia, we have an election next year and signs are pointing to a hung parliament or minority government which creates further uncertainty.
Reasons to remain Positive:
1. Inflation is likely to continue to move downwards as labour markets ease with demand growth and commodity prices trending down from their post covid high.
2. Central Banks around the globe continue to ease interest rates providing a backdrop for economic growth.
3. Whilst global growth is likely to slow in 2025 to just below 3%, it is still likely to strengthen in the second half helped by rate cuts. Australian growth is likely to edge up to 1.8% helped by rising real wages, tax cuts & rate cuts and this should see profit growth return (according to Shane oliver of AMP).
Currently global business conditions surveys are still consistent with growth, although on a slowing trajectory. If the world can avoid any further deepening geopolitical tensions; if Trump policies can be moderated around trade tariffs and immigration; and inflation can be kept at bay allowing Central Banks to continue the easing cycle and promoting economic growth, then we can continue our positive run into 2025 and beyond, albeit at single digit positive returns.
PMIs are surveys of business conditions and confidence. Source: Bloomberg, IMF, AMP
Some Words to Ponder Over:
“The sun teaches to all things that grow their longing for the light. But it is the night that raises them to the stars” –Khalil Gibran
Courage taught me no matter how bad a crisis gets … any sound investment will eventually pay off.” — Carlos Slim Helu
We wish Everyone a Safe and Merry Christmas and a Happy New Year! We pray for peace around the world!