Markets were generally firmer in January, kicking off the calendar year to a promising start. The ASX 200 was 4.6% higher in January and, for a change, managed to outperform the US S&P 500 index which rose 2.7%. Overseas financial markets were mostly ahead in January, which saw Donald Trump’s return to the presidency, as well as a generally resilient global economy. Global sharemarket indexes performed well, with European markets strong, South American and Asian markets bouncing, and Japan flat.
Looking more closely at the ASX, Gold was the best-performing sector supported by a higher gold price and rising geopolitical risks. Defensive sectors lagged, with Utilities, Food & Beverage, and Telco all declining in an otherwise strong month for equities. Growth stocks continued their outperformance versus value stocks, with small caps starting to do better, but still underperforming over the last year.
A major feature of the last few months has been the sharp decline in the Australian dollar (AUD) versus the US dollar (USD), although there was a small reprieve in that trend during the month. We expect the AUD to weaken further, as international currency managers may view it as a potential casualty in the anticipated trade war between the US and China. Tariffs and whether they are fully or partially implemented by the new US administration are bound to create additional uncertainty and volatility in markets in the months ahead.
Following a stronger-than-expected inflation report in Australia for January, the futures market is now pricing in the likelihood that the Reserve Bank of Australia (RBA) will soon begin its rate-cutting cycle. One risk to this outlook is a further sharp decline in the AUD, which could be inflationary and limit the RBA’s options. Typically, defensive sectors such as Health, Staples, and Gold perform well in the year following the first RBA rate cut, which should support FY26 growth for Domestic Industrials.
The big “macro” questions for 2025
- How will the US economy fare this year?
The consensus is for real GDP growth in the world’s largest economy of 2.1%, with some expecting even higher growth; we are in an upgrade cycle with regular increases in forecasts. Indeed, the International Monetary Fund (IMF) has recently upgraded its forecast of US growth from 2.2% to 2.7%. With Donald Trump now in office, it will be interesting to observe whether he can retain the confidence of businesses, households, and the markets – particularly with the uncertainty surrounding tariffs. - Will the US Federal Reserve (Fed) and other central banks cut rates further?
Key central bank interest rate policies remain on the path to cut rates, with the European Central Bank (ECB) most likely to make the largest cuts. The Bank of Japan (BoJ) is an exception. Interest rates will likely comedown in 2025, with the baseline forecast for the Fed to make two 25 basis point (bp) cuts this year (in June and December). The risks to this forecast are that the Federal Open Market Committee (FOMC) might decide to cut before June if there is a sharper deterioration in the economic data (eg. say, caused by a trade war). - How will the policies of the new Trump administration impact the US and the rest of the world?
This is a big unknown. Tariff policy and the potential for a global trade war are certainly a key concern for markets and corporates. We will have to be patient and see how events unfold. Because of these uncertainties, we anticipate market volatility is likely to increase. - Where are the best opportunities in Emerging Markets?
We see India as a good opportunity, with China relatively lower down the rankings. There are issues with structural weaknesses in China that will take time to resolve (such as real estate and housing crises, demographics, capital outflows, and deflation), and pressure on emerging market (EM) economies because of the high USD. Nevertheless, those EM equity markets with strong domestic fundamentals that are relatively insulated from external risks and have supportive local policy are well placed to outperform. We are attracted to India but recognize that much of the potential growth is already baked into expensive Indian markets. There remain outstanding opportunities for Australia to expand and deepen our trading, cultural, political, and military ties with India.What are the biggest risks for the global economy and markets in 2025? A global trade war because of Trump ratcheting up tariffs on various countries is probably the most significant risk to the global economy and markets. This worry will continue until we know precisely how tariffs will work, which countries they will be imposed upon, at what rates, and when they start. Trade policy uncertainty needs to be reduced, and the sooner the better. Currency disruption and volatility is another key concern for markets.US markets are highly priced
Overall levels of share market valuations have reached high levels, particularly in the US, and price-to-earnings (P/E) multiples have increased meaningfully. In the case of the US, while much of this reflects the largest technology companies, the equity market remains expensive relative to history even if excluding large-cap tech. Furthermore, while other equity markets around the world are much cheaper than the US, most are not particularly cheap relative to history. The main exceptions are China and the UK, which are cheap (but for good reasons).
Looking ahead
As noted previously, prudence suggests that positive investor sentiment is stretched, valuations are high, and uncertainty
around tariff policies as the new Trump administration takes control is growing. We think that a moderately defensive
stance remains sensible.
