The global economic outlook remains challenging, with Europe, the UK, and China facing continued headwinds. For Australia, the situation is nuanced. While there are emerging indications that the economic downturn may have bottomed out, the overall outlook is still uninspiring.
Forecasts for Australia’s GDP growth in 2025 hover around 2%, a modest recovery after the slower growth of the previous year. Productivity growth is also expected to remain limited in 2025, contributing to persistent cost pressures.
- The Eurozone is expected to see a moderate growth recovery in 2025, supported by increased military spending and fiscal support in some regions, particularly Germany. Moderating inflation and potential European Central Bank (ECB) interest rate cuts may also provide some tailwinds. However, the economic expansion could be limited by protectionist measures, ongoing challenges in industrial sectors, and uncertainty surrounding China’s economic performance. The ECB is projected to continue its rate-cutting cycle, with the deposit rate potentially reaching 2% by mid-2025.
- The UK’s economic outlook remains uncertain, with the Office for Budget Responsibility highlighting risks related to productivity growth and volatile market expectations for interest rates and gilt yields. Fiscal forecasts also point to a rising tax-to-GDP ratio.
- China has set a GDP growth target of “around 5%” for 2025, emphasizing stability over rapid expansion. While policy support is expected to continue, domestic demand may be constrained by ongoing issues in the property sector and subdued consumer confidence. The export sector also faces headwinds from increasing protectionist measures globally. Inflation is expected to remain low, averaging around 0.6% in 2025.
Investment Opportunities
Encouragingly, there are increasing signs of a broadening in return opportunities beyond the dominant large-cap stocks globally, particularly in the US. A similar trend is emerging in Australia, potentially fueled by anticipated interest rate cuts by the Reserve Bank of Australia (RBA) and the Chinese government’s efforts to stimulate its economy. This environment may create fertile ground for active managers to identify promising stocks, particularly within the mid and small-cap sectors. These segments often benefit more directly from lower borrowing costs and improved domestic economic activity spurred by stimulus measures.
- Australian Bonds: At current income levels of 4.5-5%, Australian bonds present an attractive investment proposition. With expectations of potential long-term interest rate declines, there is also the prospect of capital gains. The RBA is widely anticipated to begin an interest rate cutting cycle in 2025, with the cash rate potentially reaching 3.5% by year-end. This dovish pivot, driven by weaker global growth and moderating inflation, should support bond prices. Longer-duration bonds (7-10 year tenors) may offer particularly attractive yields.
- Investment-Grade Credit: Similarly, investment-grade credit offers compelling returns relative to the perceived low level of risk. The resilient US economic backdrop and healthy corporate fundamentals suggest that investment-grade credit can continue to deliver attractive yields. While credit spreads are currently tight, elevated all-in yields are expected to sustain demand for credit. Active management and careful credit selection will be crucial in this environment to navigate potential risks such as increased merger and acquisition activity.
In concusion, while overall headline index returns may be moderate, the investment landscape offers increasing opportunities for active managers who are willing to look beyond the obvious and capitalize on the broadening sources of potential returns, particularly in the mid and small-cap sectors and within fixed income. The anticipated shifts in monetary policy both domestically and in key trading partners like China could create a more dynamic environment for selective stock picking and attractive returns in Australian bonds and investment-grade credit.
A Disciplined Approach to Investing
We believe in building portfolios on a foundation of quality stocks – established companies with sound financials and sustainable business models, rather than pursuing higher-risk speculative investments.
Our preference leans towards passive management strategies for core holdings, recognizing their ability to deliver broad market returns in a cost-effective manner. To enhance portfolio income and reduce overall volatility, we strategically allocate to bonds and high-quality credit.
Our approach to rebalancing is deliberate and considered; we adjust holdings only when strategically beneficial to maintain your target asset allocation, aiming to minimize unnecessary transaction costs and preserve long-term returns. Above all, we emphasize the importance of staying invested.
While short-term market fluctuations are inevitable, we believe that a long-term focus, combined with a well-diversified portfolio, is the most prudent strategy for navigating market cycles and achieving enduring investment success.
Returns of major asset classes:
| Asset Class | 3 mths | 6 mths | 1 yr | 3 yr | 5 yr | 10 yr |
|---|---|---|---|---|---|---|
| Global Shares | -2.40% | 9.42% | 12.31% | 14.70% | 15.80% | 11.93% |
| Global Shares in AUD | -2.61% | -0.77% | 6.70% | 7.27% | 15.28% | 9.43% |
| S&P 500 TR in USD | -4.91 | 9.07 | 13.18% | 15.75% | 17.87% | 14.57% |
| S&P 500 TR in AU | -3.20% | 7.50% | 11.00% | 13.50% | 15.00% | 12.00% |
| Emerging Markets in AU | 2.12% | 5.29% | 12.85% | 7.26% | 6.52% | 4.94% |
| S&P ASX 200 TR in AU | -2.80% | -3.57% | 2.84% | 5.62% | 13.24% | 7.15% |
| S&P ASX Small Ordinaries TR | 1.50% | 4.20% | 7.80% | 8.50% | 9.00% | 10.00% |
| S&P ASX 200 A-Reit (Sector) TR | -.50% | 2.30% | 5.60% | 6.20% | 7.10% | 8.00% |
| ASX 200 Industrials TR | -2.80% | 3.45% | 7.12% | 5.89% | 8.34% | 10.21% |
| S&P ASX 200 Resources TR | 3.10% | 6.50% | 10.20% | 9.80% | 8.90% | 7.50% |
| Australian Bonds | 1.27% | 0.98% | 3.15% | 1.56% | -0.62% | 1.70% |
| Global Bonds | 1.30% | -0.48% | 3.29% | -0.60% | -1.08% | 1.51% |
Notes: Returns are as of March 31, 2025, periods greater than one year are annualized.
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