After a strong year for investors, our outlook for 2025 anticipates more moderate returns, highlighting a growing landscape for active management strategies.
Key market dynamics include the continued prominence of US equities, representing 74% of global market capitalization. Notably, the ‘Magnificent 7’ stocks now constitute a significant 34% of the US market and have driven over 50% of the S&P 500’s recent performance.
In Australia, market returns have been largely influenced by Financial and Technology sectors. However, the Australian share market faces potential challenges stemming from subdued economic growth and declining productivity. Economic and market weakness persists in Europe and the UK.
China’s economic recovery remains constrained by cautious consumer sentiment and a struggling property sector. While near-term market fluctuations are expected, we see increasing opportunities for active managers to identify value beyond the largest capitalization stocks.
The end of last year reminded us that the share market can have its ups and downs. Even though inflation wasn’t as high and interest rates in the US and Europe were still being reduced, global share markets and the Australian ASX 200 saw small falls when measured in US dollars.
However, because the Australian dollar fell quite a bit against the US dollar, the global share market’s slight loss of -0.9% in US dollars actually turned into a strong gain of 11.1% for Australian investors. Over the whole year, returns from global, US, and emerging markets were very good.
Despite this positive performance, the fact that the Australian economy is still a bit weak helps explain why Australian shares didn’t do quite as well compared to other markets.
In February 2025, the Reserve Bank of Australia (RBA) made a significant move by cutting the cash rate for the first time in five years. This reduction lowered the cash rate from 4.35% to 4.10%. This positive development in bond prices within Australia indicated a growing optimism among investors that the RBA would implement further rate cuts throughout 2025.
The included chart, titled ‘Global central bank rate decisions’, would visually represent the various interest rate adjustments made by central banks around the world during a specific period. This would likely show that the RBA’s decision was part of a broader global trend or potentially an outlier, depending on the economic conditions and policy responses of other nations. For example, the chart might highlight that while Australia was beginning to cut rates, other central banks were either holding rates steady or even increasing them in response to their own unique inflationary pressures or economic growth outlooks. Examining this chart alongside the RBA’s decision provides a valuable context for understanding Australia’s monetary policy stance within the global economic landscape.
Source: Federal Reserve Bank of St. Louis (FRED)
The outlook for long-term US interest rates remains uncertain.
Commentators generally expect the Trump presidency to support domestic economic growth, though it may weigh on global growth prospects. Trump’s rapid implementation of his agenda has surprised many and introduced new variables into the global economic landscape.
Looking ahead to 2025, while uncertainties remain, our base case assumes negotiated or delayed tariffs and a soft landing for the US economy. Under this scenario, the Federal Reserve would likely continue to ease rates, US GDP growth would remain modest at around 2.5%, and inflation would ease slightly.
However, risks remain. A sharp rise in US inflation or an escalation into a full-blown trade war would likely weigh heavily on global equity markets. Geopolitical tensions are also elevated, and much will depend on how President Trump chooses to navigate these challenges.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice, or invitation to purchase, sell, or otherwise deal in securities or other investments. Before making any decision regarding a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
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