2024 proved to be surprisingly robust for global financial markets, driven by better-than-expected economic activity, particularly in the United States, momentous growth in machine learning and associated technologies and a corresponding spike in the share prices of the major industry participants.
It was a very political year too. More people voted in a general election in 2024 than any year in history (more than 4 billion people in 70 nations). The unmistakable trend was a shift away from the incumbent, a trend probably caused by post-COVID voter disaffection. The November US election was a red sweep – the Republicans winning the Presidency, Senate and House. The decisiveness of victory stimulated further stock market rises, but bond yields, worryingly, have also risen at odds with higher share prices.
There’ll be a cacophony of noise coming from the White House in the first quarter of 2025, and an unprecedent flurry of Presidential Executive Orders, as Donald Trump seeks to leverage electoral majority with hyperactive policy pronouncements. Notably, there is a trend change to world order coming, specifically the shift towards protectionism in the form of tariffs and sanctions. Trump considers the proportion of government receipts coming from corporate and personal income tax (about 60% of total revenue) to be constricting, given proportionately very little is received from tariffs in the free-trade neoliberal era. To ‘make America great again’ Trump wants local businesses protected at the expense of foreign competitors.
The proposed US policy changes and the shift in the global trade order stands to be an important eco-political factor for markets to navigate in 2025. It is important to remember that Trump has a boisterous manner (talk loudly, irrespective of capacity to deliver) but has only a wafer-thin majority in the Senate
and House, both of which go back to the voters in late 2026 (all the House and one-third of the Senate), so he might encounter some barriers to enacting some policy changes.
In Australia 2024 was a year of insipid economic growth, a satisfactory stock market and a reluctance by the Reserve Bank to reduce the interest rate, citing insufficiently low core inflation. 2025 looks to be more of the same, at least for a short period. It’s likely our core economic data will worsen, but much will be hidden by the noise associated with the forthcoming election campaign. What can’t be hidden though is the bond market, which is ratcheting up long term interest rates, due to inflationary and fiscal looseness concerns, and similarly the very weak Australian dollar.
Australian economic growth is being augmented by a surge in government investment and spending. Meritorious, yes, as social services need bolstering and obscene government over expenditure on ‘consultants’ must be reined in. But excess government spending can inflate public sector liabilities, and aggravate inflationary pressures, so more disciplined fiscal restraint needs to be a feature of the years ahead, without which we run the risk of elevated interest rates and consequently a heightened risk of recession.
It’s been a poor period for the prices of Australia’s principal export commodities. Iron ore has retreated below US$100t, coal has declined precipitously to US$115t (the 2022 peak was over US$400t!), and wheat is down to US$530 a bushel - now in a 3-year decline from the heady prices of 2022/23. This doesn’t augur well for our short-term economic outlook, nor for government royalty and tax receipts, nor the Australian dollar. However, volume demand hasn’t declined as much as the raw commodity prices, suggesting a short-term resetting of prices is in play here, rather than a lasting down cycle. We think therefore that commodity related investments might positively surprise in 2025.
Of more concern is the propensity for treasury offices to keep spending with scant heed to the fiscal consequences, and for central banks to be seen as the backstop, expected to come to the rescue whenever circumstances dictate, and with insufficient restraint. This playbook has been the ‘go to’ policy for nearly twenty years, and markets have become unreasonably indifferent to the risks. This can’t and won’t end well, as excess indebtedness always needs appropriate restitution, whether it be household, corporate or sovereign. Will this reckoning be soon, or will the can of fiscal irresponsibility be kicked for a few more years before the inevitable reckoning? Time will tell.
Australian Shares
The Australian stock market, as measured by the S&P ASX200 Index, fell by 1.34% in the December quarter, a modest decline caused mostly by soft domestic economic data, and weaker commodity prices. Three of the big four banks (ANZ, NAB and Westpac) reported and paid dividends during the quarter, improving the short-term returns for their shareholders.
The share prices of mining companies declined last quarter, reversing the price boost from the China stimulus in September. BHP shares have fallen to under $40 which we consider to be decent value for the world’s biggest miner. Rio Tinto shares have fared a bit better, helped by their copper and iron ore growth projects. In energy, the Trump victory didn’t do much for oil and gas prices, which have been under some excess supply pressure, but a deregulatory trend will likely improve the operating conditions and efficiencies in this sector. Woodside remains a favourite for their large and diversified portfolio of LNG projects and developments.
The domestic consumer has been belt-tightening, as elevated costs, particularly services such as housing and insurance, crimp the capacity and inclination to spend. Consequently, consumer staple businesses such as Woolworths, Coles and Metcash (IGA) have experienced waning share prices. Moreover, discretionary consumables such as liquor and fast food have struggled – witness Domino’s, Collins Food (KFC) and Endeavour, all of which now screen as undervalued – considerably so in the case of Endeavour.
Bank shares have continued to trade higher, having caught and benefitted from market momentum rather than meaningful profit growth. This sector is overpriced, so shareholders should expect less (and perhaps negative) share price movement this year, but dividends remain reliable, and mostly fully franked.
The Australian stock market has retreated a little, which makes it more prospective. Interestingly, the overall index is fairly high, bloated by a few overpriced large cap stocks, but there are lots of undervalued shares when one looks further down the list. Indeed, about 70 of the top 100 companies now offer a prospective return greater than an investors’ reasonable objective. This objective, in our analytical assessment, is the prevailing risk-free interest rate plus the amount of required compensation for the stock market risk (known as equity risk premium).
The timing and potential retracement of this unusually wide dispersion between a handful of expensive stocks and a long tail of cheap ones stands to be an important market theme in 2025.
Global Shares
In the December quarter the MSCI world stock market fell marginally by 0.4%, a pause to the stellar run that had commenced in late 2022. US shares continued to perform, up 2% for the quarter, but markets fell in Asia, notably in China which was down by about 5%.
A prominent market feature in 2024 was the sharp (but thankfully temporary) decline in Japanese shares following the so called ‘Yen carry trade’ event in August. The policy shift by the Bank of Japan caused a bout of significant volatility as (mostly) US investors were pressured into unwinding low-interest rate Yen denominated loans. The consequential spike in volatility was considerable and serves as a reminder that excess borrowing for share investing is fraught with risk.
In Europe, the German stock market had a strong period, driven by technology and financial stocks, most prominently SAP, and widespread expectation of European interest rate reductions. Britain didn’t fare so well due to domestic economic weakness, some political uncertainty (notwithstanding the strong mandate from their recent election) and an uptrend in long-term interest rates.
Of overarching consideration is the emerging change to the global trade and economic order reflected by Donald Trump’s tariff agenda, and an inclination towards protectionist and populist policies elsewhere. There will inevitably be winners and losers, and more significant market volatility in 2025. Global inflation has mostly been tamed by restrictive central bank policies, and the waning of energy and supply side costs of recent years. This has allowed successive interest rate reductions to be initiated by most global central banks, with the notable exception of Japan (where rates weren’t raised much) and Australia, where inflation has not backed off as quickly as elsewhere.
Shares in the United States continue to outpace the world, driven by the sheer size of their mega corporates and their capacity to earn a disproportionately high share of global profits. The US stock market, as a proportion of the world stock markets, is now significantly larger than its share of global GDP. Remarkably, US shares represent more than 70% of all global share value, whilst Europe is now less than 20%. This is seen by some as a concentration risk, with a possible calamity ahead, but this view ignores the fact that most of these large US companies – think Microsoft – have such significant worldwide operational reach that they really should be considered as global investments, rather than specifically US.
The present phase of technological advancement is profound, encompassing significant energy, automotive, social industry and workplace transitions via machine learning applications and other technologies. It’s a continuing phase of industrial revolution, the results of which will be acutely society-altering in the years to come. American companies dominate the space, with behemoths such as Nvidia, Alphabet and Microsoft, but there are European and Asian participants also, for example ASML and TSMC. Investors should maintain some exposure to this investment theme, though not necessarily just in the US.
The outlook for global investing for Australians in 2025 has some headwinds, principally the very low level of our dollar (reducing the global pricing power for domestic investors) and the relatively heady valuations in the US, the consequence of their recent strong performance. Therefore, some caution is needed, and more attention paid to opportunities in Europe and Asia.
Property Securities
The prices of listed Real Estate Investment Trusts (REITs) fell by 7% in the December quarter, reversing part of the previous quarter’s recovery. Most REITs traded ex their half-year distributions in late December, with payments due towards the end of February.
Shopping centre focused REITs are demonstrating their resilience. Scentre Group (the operator of Westfield centres) expect more than 500m customer visits for the year and reported occupancy of 99.4% and record sales of $28.8bn. Vicinity Centres reported 99.2% occupancy, but only modest turnover growth. BWP Trust, the landlord for many of the Bunnings stores, has seen its share price sag due to Bunnings vacating some sites for better positioned alternatives. The lower BWP price and the likely ~18.5c dividend infers a yield for shareholders of about 5.5%. Retail REITs are generally a lower risk property category, offering a reliable and repeatable source of distributable rent and income.
In the commercial/office subsector the market, valuation and income trends have been less predictable, as the sector continues to contend with subdued occupancy and elevated interest rates. Dexus is a market leader and has been actively diversifying its portfolio and operations towards asset management, infrastructure, and third party funded development. Dexus’ management exudes a positive outlook as they efficiently recycle capital whilst retaining their prime real estate assets. The stock market has been underwhelmed, waiting for a shift downwards in the valuation capitalisation rate, which may have to wait till the RBA cuts the interest rate.
REITs with a residential focus such as Mirvac and Stockland should have performed well whilst property acquisition and rental demand is so high but instead have been somewhat disappointing investments lately. Elevated construction costs have been crushing, such that their operating margins are lower than expected. Mirvac stands out prospectively, having some 12,000 residential lot development leads for the coming years and a growing build-to-rent asset book. Their 9c projected distribution infers a yield of about 4.8%.
There are some interesting REITs in non-core sectors including Waypoint (petrol stations), HomeCo Needs (convenience stores), Arena and Charter Hall (social infrastructure), Ingenia (residential communities) and HealthCo (healthcare properties), all of which provide portfolio investors some diversification.
The largest REIT by a considerable margin is Goodman, a developer and owner of industrial properties and data centres. Goodman is so big now that it represents some 43% of the REIT sector and has hence benefitted from passive investor flows. Goodman operates very differently to most other REITs in that it retains most of its operating earnings and only pays a miserly 0.8% yield. This strategy favours growth which has been delivered, but the company shares now screens as expensive, in our opinion.
REIT investors should enjoy improved investment returns in 2025 as the distribution yields are attractive, albeit without much increase, and valuations should improve due to capitalisation rates having peaked. An RBA rate cut decision might be the catalyst for a strong rally in this sector.
Interest Rates
Australia’s Reserve Bank has not yet commenced an interest rate reduction cycle, citing the need for stubborn core inflation to ease further. It’s probable that the RBA board will soon make their determination and initiate a small rate cut – possibly at either their February 18 meeting or April 1 meeting. Should a federal election be called prior to the February meeting the RBA may defer their decision till May, so that a decision is not perceived as political.
Overseas, rate reduction programs continue, including the US Federal Reserve who have cut their Federal Funds rate three times. However, the US Federal Reserve has indicated a disinclination towards further aggressive rate cutting, suggesting just one or two more small cuts ahead in 2025.
Central banks are making small downwards rate adjustments, but oddly, at the same time, long-term bond yields are rising, in some instances rapidly. This has caused a fall in bond prices, thereby improving their relative investment appeal as an asset class.
The yield on UK bonds (known as gilts) has risen significantly due to their new governments’ budget that suggested more borrowing despite the weak economic environment, and a general trend higher in global long-term rates. US long Treasuries have been similarly weak, rising to 4.75% from their September low of 3.7%, whilst the comparable Australian rate is again above 4.5%, representing a decent return for a very low risk investment.
The upwards trend in long-term rates suggests all is not well with sovereign financing. Markets are perceiving difficulties ahead and dishing out the punishment in the form of higher rates. The primary problems are unconstrained government budget deficits and fiscal recklessness, a looseness of policy that was understood and accepted during the pandemic period but is no longer easily justified. Sooner or later, if governments don’t control their unfunded spending, the bond market vigilantes will whack the interest rate market hard.
Domestically, the decision by the banking regulator (APRA) to curtail the issuance of AT1 hybrids to retail investors will lead to a temporary void in the investable universe. This void will likely be filled by some creative new fixed income products, some that will masquerade as secure, but carry risks greater than immediately apparent. Amongst this there is a proliferation of ‘private credit’ funds, of varying quality and appeal. Investors are advised to carefully assess and understand such products and seek advice.
So, in 2025 we will likely witness belated but not significant cuts to short term rates, yet volatility and high longer-term rates. Term deposits should remain an attractive low-risk option, as too will higher quality credit securities and corporate bonds.
Outlook
It is probable that stock markets will continue to trade in a relatively narrow range, but this range might widen as the year progresses due to some further weakness in the domestic economy and as the implications of new tariffs are assessed. There is also likely to be a convergence of relative value, meaning some quality company shares that performed poorly last year deliver improved shareholder returns.
Geopolitical risks persist and regrettably will likely linger, notwithstanding Donald Trump’s bluster. This may cause commodity price weakness and stall economic recovery.
Short-term interest rates should fall modestly in 2025, but governments need to rein in excessive spending or market forces will crush bond prices and turn what should be a satisfactory year for financial markets into a poor one.
Yours sincerely,
Malcolm Palmer
Joseph Palmer & Sons
This publication has been prepared by Joseph Palmer & Sons (ABN 29 548 490 818) an Australian Financial Services Licensee (AFSL 247067). Whilst the information contained in this publication has been prepared with all reasonable care from sources, which Joseph Palmer & Sons believes are reliable, no responsibility or liability is accepted by Joseph Palmer & Sons for any errors or omissions, or misstatements however caused. Any opinions, forecasts or recommendations reflects the judgment and assumptions of Joseph Palmer & Sons as at the date of publication and may change without notice. Joseph Palmer & Sons, their officers, agents, and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any securities recommendation contained in this publication is unsolicited general information only. Joseph Palmer & Sons are not aware that any recipient intends to rely on this publication and are not aware of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation, or particular needs of any individual recipient. Investors must obtain individual financial advice from their investment advisor to determine whether recommendations contained in this publication are appropriate to their personal investment objectives, financial situation or particular needs before acting on any such recommendations.