From Resilience to Risk: Australian Market Outlook for 2025

Sage Capital

January 2025

As we reflect on the key developments of 2024 and look ahead to 2025, this article provides an in-depth analysis of the trends shaping both global and Australian equity markets.

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Key Takeaways

• ‍2024 Market Performance: A strong year for global equities, driven by the US Federal Reserve's easing monetary policy and a rally in US markets following the presidential election.
• ‍Australian Market Trends: Despite global strength, the Australian market showed mixed results, with banks outperforming while resources struggled due to sluggish Chinese growth and limited stimulus.
• ‍US Monetary Policy Impact: The US Fed's three rate cuts (100 basis points) boosted sentiment, asset prices, and investor confidence, helping mitigate downside economic risks.
• ‍Rise of Passive Indexation: The dominance of passive indexation and superannuation funds has contributed to inefficiencies in the Australian equity market, notably in the banking sector.
• ‍Key Risks for 2025: Emerging risks include the potential impact of new US trade tariffs, rising bond yields, and inflationary pressures, which could disrupt short-term growth and market stability.
• ‍Sector Outlook: Growth stocks in healthcare and technology remain attractive due to consistent earnings but face valuation risks tied to bond market dynamics. Resources continue to face headwinds from weaker Chinese demand, with base metals preferred over bulk commodities.
• ‍Two-Speed Economy in Australia: Higher interest rates have widened the gap between wealthier older generations benefiting from income flows and younger, debt-burdened households under financial strain.
• ‍Sector Preferences: Sage Capital favours insurers, diversified financials, and travel stocks while maintaining caution toward banks and certain discretionary retailers with stretched valuations.
• ‍Portfolio Strategy: A focus on diversification, stock selection, and limiting macro risks ensures resilience amid evolving market dynamics. Sage Capital remains neutral on growth stocks and selective within commodities and energy sectors.

2024 in Review: Global Strength, Local Surprises, and Shifting Market Dynamics

Looking back, 2024 was a strong year for the Australian equity market as it trended higher with a strong performance by US equities being a key driver. The subsidence of inflationary pressures allowed the US Federal Reserve (US Fed) to shift to an easing monetary policy bias, cutting the official cash rate three times by a total of 100 basis points. This helped boost sentiment and asset prices in general as the market took comfort that downside economic risk was controlled. The US presidential election and the eventual Trump victory saw a strong finish to the year for markets. Equities, the US dollar, gold and cryptocurrencies were all aggressively bid as investor sentiment shifted into euphoric territory.

The Australian market was a little more subdued as resources were generally under pressure across the year with sluggish Chinese growth and a lack of material stimulus. The most notable feature of the local market was the strong performance by the banks with CBA rerating to around a 25x Price Earnings ratio and forming over 10% of the index, leaving even seasoned investors, including us, puzzled.  This breakdown in market efficiency appears linked to the increasing dominance of passive indexation and the growth of superannuation funds, that have divergent goals to maximising returns.

Navigating 2025: Balancing Optimism with Emerging Challenges

As we look forward to 2025, Sage Capital sees a generally positive outlook for Australian equities, though several risks are emerging. The primary risk is the potential impact of new US trade tariffs, which may drive domestic investment higher in the medium term but could disrupt short term growth and intensify inflationary pressures.

Linked to this is the significant disconnect building between the bond market and the equity market. Bond yields have been pushing higher throughout the year as stronger US growth and more persistent core inflation have seen interest rate cut expectations pared back. There is also a supply-demand dynamic at play, with large budget deficits requiring funding, while the US Fed's quantitative tightening―by not repurchasing its considerable holdings of government bonds as they mature, adds further pressure. This process of quantitative tightening and interest rate cuts has seen the yield curve steepen but may act to constrain growth given that US mortgage interest rates are priced off the long end. Further increases in US bond yields may challenge markets, particularly across growth stocks which were largely immune from valuation impacts last year.

We've seen similar dynamics at work in Australia where higher interest rates have largely been ignored by long duration growth stocks, across both healthcare and technology. Whilst this is the area of the market that is delivering the most consistent earnings growth with a combination of pricing power, low fixed costs and high margins, it's also the area of the market which has become the most crowded and valuations have been pushed beyond historical extremes in many cases. It's hard to ignore growth stocks when looking for high quality earnings compounders, but the risk of a sharp valuation correction is rising if these bond market dynamics continue. Our approach is to remain broadly neutral while identifying areas of relative valuation and earnings outperformance.

Commodity prices have been generally soft, hampered recently by the strength in the US dollar, but broadly reflecting softer growth in China. It is difficult to be positive going forward on bulk commodities as China's population declines and an apparent lack of policy desire to stimulate the property and infrastructure sectors given the overbuilding that has already occurred. Our preference remains for base metals such as aluminium and copper where electrification demand is a key support for prices. Lithium remains oversupplied in the short term and western tariffs against Chinese EVs are unlikely to boost demand. However, the downside is also limited by cost curve support, so Sage Capital are relatively neutral and focused on stock selection. Energy has been unpopular as macro growth concerns and softening demand growth in China amongst a strong EV transition, although supply discipline by Organisation of the Petroleum Exporting Countries (OPEC) has helped provide price support. Energy stocks look cheap, and the space is heavily shorted so a contrarian move wouldn't surprise, particularly if the incoming US government drives stricter adherence to Russian and Iranian sanctions on oil exports.

The Australian economy has remained reasonably strong, though higher interest rates have put pressure on heavily leveraged households. This has created a two-speed economy, split along demographic and generational lines, with older generations that have accumulated wealth benefiting from higher income flows, while younger generations, burdened by mortgage debt and higher rents, have faced greater financial strain. We expect this dynamic to persist in the short term, with a tight labour market and persistent services inflation likely keeping the RBA on hold until mid-2025. Even then, policy isn't that tight, and absent a growth shock, interest rates are unlikely to be significantly reduced.

Sector Insights: Opportunities in Travel, Financials, and Diversified Strategies

Sage Capital maintains a preference for travel stocks where older cohorts with wealth have an increasing preference to travel. While we don't foresee a material downturn in spending, weaker terms of trade with softer commodity prices, higher interest rates eroding savings buffers, and uncertainty surrounding the federal election are likely to keep consumer spending constrained. While performing well, some discretionary retailers, much like the banks, have re-rated to valuation levels that can't be justified by their growth outlooks.

A solid, if unspectacular, growth outlook for the Australian economy and a strong labour market suggest that a bad debt cycle isn't imminent for the Australian banks. By the same token, banks have limited earnings growth potential as mortgage competition keeps net interest margins under pressure, book growth is limited given high household indebtedness, and rising costs are difficult to control amidst ongoing technology, security and regulatory demands. The valuation expansion doesn't appear justified by fundamentals, presenting more opportunities for shorting positions.

Sage Capital's preference within the Yield group has for some time remained with insurers and diversified financials, and this is unchanged. These stocks all have ongoing earnings growth, even as the insurance premium cycle nears maturity. Valuations are closer to fair than cheap given the broad re-rating across the last year, but they are still clearly preferable than those in the banking sector.

The portfolios are constructed using Sage Groups to minimise macro volatility with a focus on individual companies within these groups. Sage Capital maintains low net exposure to each Sage Group to limit the impact of unpredictable macro risks, and as always, the portfolios are well diversified and liquid.

Funds operated by this manager:

CC Sage Capital Equity Plus Fund, CC Sage Capital Absolute Return Fund

 Airlie Australian Share Fund Quarterly Update

Airlie Funds Management

December 2024

Emma Fisher discusses key drivers and insights from the recent quarter and how the portfolio was positioned to navigate the market. Emma also highlights the best performers for the fund and outlines opportunities the team continues to monitor as we move into 2025.

Funds operated by this manager:

Airlie Australian Share Fund, Airlie Small Companies Fund

Important Information: 

This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 trading as Airlie Funds Management ('Airlie') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to an Airlie financial product or service may be obtained by calling +61 2 9235 4760 or by visiting www.airliefundsmanagement.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of an Airlie financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Airlie makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Airlie. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Airlie will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

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Hedge Clippings | 24 January 2025

Five days in from Trump's inauguration, and no one is left guessing on the question of whether he's as committed in office as his promises were on the campaign trail. With over 200 executive orders (which bypass Congress) reportedly signed since his first day in office, he's set a record and if he keeps going, he'll be approaching a record for his entire term. By comparison, the previous 10 US Presidents (including Trump's first term when he signed a modest 220) only signed an average of 266 executive orders in their entire terms. Maybe he's just trying to break his own record?

It has certainly been a whirlwind start, possibly a reflection that this time he expected to win, whereas in 2016 he (and many others) believed that was unthinkable. One thing to remember about Trump, irrespective of whether you think he's the reincarnation of the Messiah, or the devil, is to expect both the expected, and the unexpected, often on the same day, and possibly the same conversation. Frequently the difficulty is sorting his thought bubbles from firm policy - think Greenland for instance. It was too cold in Washington to hold his inauguration out in the open, but maybe his climate change policies will fix that problem, and also turn Greenland... well green, instead of white?

On a more serious note, the world is yet to really understand how his major policy initiatives will play out on the world stage, or who outside America will be the beneficiaries - if any. His unashamedly America First policy, particularly around tariffs and border protection, both trade and immigration, are both highly contentious and depending on one's views, or where you live, or your economic position, likely to result in magnificence, or mayhem. As the world's most powerful man, and as leader of the largest economy there doesn't appear to be any other leader or country, apart from Denmark who is miffed about his Greenland stance, or Panama who are prepared to call him out.

The remainder, possibly with the exception of Canada's outgoing Prime Minister Justin Trudeau, seem to be holding their tongues, and possibly their collective breaths.

From Australia's perspective, the same applies, with our ambassador Kevin Rudd, along with Penny Wong, no doubt working their diplomatic skills for all they're worth. Trump has a vindictive streak and won't forget Kevin 07's previous remarks, but to what extent we're friend or foe, winners or losers, remains to be seen. When push comes to shove, our military alliance and Pine Gap are, to the horror of the Greens, likely to help.

Turning to fund performances, both December's results and those for the full 12 months of 2024, are summarised below.

Performance data in the 12 months to December 2024 across all 900 funds in FundMonitors' database, which covers equities, fixed income, property, infrastructure, alternatives, and digital assets, highlights the mix of outcomes and the importance of careful research across both asset class and fund selection. In the short term - December - global and Asia-focused equity categories delivered mostly positive returns: Leading the way was Equity Long - Asia, up 3.32%, while Equity Long - Large Cap - Global gained 1.24% and Equity Long - Small/Mid Cap - Global added a modest 0.07%. Meanwhile, Australian equities struggled, with Equity Long - Small/Mid Cap - Australia falling 1.58% and Equity Long - Large Cap - Australia down 2.92%. Fixed income categories made slight gains, while property (-3.53%) and infrastructure (-2.57%) experienced declines. The table below shows the highest and lowest returns seen within each broad peer group and across the entire database, both during the month of December 2024 and across the full calendar year.

News & Insights

Market Commentary - December | Glenmore Asset Management

Long-term Investing | Airlie Funds Management

December 2024 Performance News

Altor AltFi Income Fund

Argonaut Natural Resources Fund

Bennelong Emerging Companies Fund

Bennelong Twenty20 Australian Equities Fund

Cyan C3G Fund

DS Capital Growth Fund

Quay Global Real Estate Fund (Unhedged)

Skerryvore Global Emerging Markets All-Cap Equity Fun

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The Advantages Of Being A Small Investor

Marcus Today

January 2025

I have never liked the expression "Smart money". It is demeaning to individual investors and used by the finance industry to imply they are smart and the rest of you are by implication "Dumb". But a lot of supposedly smart professionals do some very dumb things, and a lot of non-professional investors (you guys) do some very clever things.

What Big Investors Can Do That You Can't

There are a few "Smart Money" activities available to institutional investors that most individual investors can't access. These include:

Access to IPOs and Placements

Big institutions often get priority access to IPOs, share issues, and placements. They get it because the brokers controlling the issue want to suck up to them to get their secondary market business.

Inside Information

There's an old broker's saying--"If you're not on the inside, you're on the outside." Many private investors assume that institutional investors have access to inside information and that the market is rigged against them. But this isn't the case.

I once stood in a lift with a very experienced professional trader who overheard two brokers discussing an inside tip. In his gravelly voice of experience, he said, "If I'd never been told any inside information, ever, I'd be a million dollars better off." While inside information might exist, it's neither legal nor common, even among professionals. The misconception that everyone else has it is simply not true. That's not the game.

Writing Options for Incremental Gains

Wealthy investors sometimes write out-of-the-money call options against existing holdings. While this strategy can generate small, incremental returns, it doesn't provide substantial gains. It's also not practical for most individual investors.

Why Being a Small Investor Is an Advantage

Despite the perks available to big investors, small investors enjoy significant advantages that professionals can only envy.

Liquidity Isn't an Issue

Institutional investors often face liquidity problems, struggling to enter or exit positions without affecting share prices. Small investors can buy and sell quickly without influencing the market. Despite the perks available to big investors, small investors enjoy significant advantages that professionals can only envy.

Freedom to Adapt

Unlike fund managers who must follow strict mandates, small investors can shift strategies whenever they like. You're free to act without needing approvals or explanations.

The Ability to Hold Cash

Fund managers often can't hold cash even when markets drop. Small investors can exit the market and wait for better opportunities, avoiding unnecessary losses.

No Need for Over-Diversification

Fund managers must diversify to meet benchmarks, even if it means including underperforming stocks. Small investors can focus on a few high-quality opportunities instead.

No Reporting Requirements

Professionals deal with compliance regulations, financial services guides, and audits. Small investors avoid these headaches, saving time and money.

Minimal Costs

Running a self-managed portfolio means avoiding the overheads that come with managing large funds. There are no compliance fees, licensing costs, or administrative burdens.

Instant Decisions

Small investors can react to market events in real-time. Fund managers, on the other hand, face internal approvals that delay decisions.

The Downsides of Being a Small Investor

Of course, small investors do miss out on some perks available to institutional players:

No Broker Perks

Big investors enjoy access to IPOs, discounted placements, and premium research. Brokers often court them with lunches and events.

Limited Research Support

Institutions have teams of analysts hunting for investment opportunities. Individual investors typically rely on their own research.

No Excuses for Losses

While fund managers can justify losses by pointing to market-wide downturns, small investors face personal accountability for their results.

Why Flexibility Beats Big Money

Sure, big investors get the perks--lunches, research, and IPOs but they're also stuck in a system full of rules, reports, and restrictions. Small investors, on the other hand, have the freedom to move quickly, cut costs, and make decisions without answering to anyone. And let's be honest when it comes to investing, freedom is worth more than a free lunch.

Author: Marcus Padley

Funds operated by this manager:

Marcus Today Equity Income SMA, Marcus Today Growth SMA