Investment Market Review and Outlook
December 2024
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Key takeaways
- The global economy has proved more resilient than expected in recent years – resulting in strong returns for members.
- For much of 2024, global markets were upbeat – focused on the growing success of central banks in taming inflation, resulting in widespread cuts to official interest rates (albeit not in Australia).
- The election of Donald Trump in November, however, saw this process placed on hold, and US Treasury yields (interest rates) returned to year highs as bond market investors again factored in the risk of higher inflation.
- Despite growing tensions across the Middle East, oil prices declined during the year, exacerbated by continued economic weakness in China which saw reduced demand.
- Investors and markets are now waiting to see the impacts of President Trump’s policy agenda on the growth and inflation outlook.
Market Outlook
We expect that economic growth in the US will continue to be robust, and this is generally positive for financial markets. On the other hand, if President Trump delivers on his pre-election promises by substantially raising tariffs, for example, this could hinder growth and put upward pressure on interest rates.
Outside of the US, markets have been more subdued, restrained by continued economic weakness and political instability in Europe.
In Australia economic growth remains subdued, and while inflation has been coming down, it is still too high, although the labour market has remained resilient. 2025 is also an election year, so we may see some policy changes which could affect markets.
Looking forward there are three themes which are likely to impact markets:
1. The political landscape
All eyes will be on the incoming US administration and President Trump’s policy agenda. When Trump was first elected in November, the initial market reaction was largely positive. The US share market rose strongly, and financial and energy stocks performed well on the expectation of increased de-regulation as well as Trump’s emphasis on traditional oil and gas exploration over renewable energy initiatives.
Bond yields (the interest rate on Government bonds) rose, because markets expected Trump’s policies to lead to higher inflation and higher government borrowing. When yields rise, the price of bonds fall resulting in lower returns and that’s what we’ve seen.
Markets are now waiting to see the detail of Trump’s actual policy agenda. He has made strong commitments on trade and immigration, but there is a larger than usual degree of uncertainty about the specifics, and this could create volatility in markets as the full details of his policies take shape.
In Australia we have an election due in the first half of the year – and this could impact markets, depending on the outcome and the policy agenda of the incoming government.
2. Interest rates
2024 saw interest rates reduced in many developed economies (with Australia a notable exception). This happened as the inflation backdrop improved globally and central banks became more confident to reduce their level of policy restriction.
In 2025, the key question is whether the inflation outlook continues to normalise, which could allow rate reductions to continue. Lower rates are generally positive for markets.
Locally, the story is more nuanced. The Reserve Bank of Australia (RBA) did not reduce rates in 2024, although they had not previously raised rates as much as we had seen in other economies, in an effort to support our labour market (keep unemployment low).
Markets are expecting the RBA to commence a rate cutting cycle as soon as February 2025 – but this is not a foregone conclusion. However, and regardless of the exact timing of cuts, one thing we are more confident of is that the “floor” for interest rates this cycle will be higher than recent cycles. In other words we likely won’t see rates reduced to their previous historic lows.
3. Technology
Technology related investments have delivered very strong returns in recent years driven by the growth and expansion in AI. Generative AI has become a part of everyday work tools, and we witnessed accelerating adoption and a rapid expansion in AI use cases.
There are some amazing examples of company-specific returns, including from the so-called Magnificent 7 (Apple, Microsoft, Amazon, Alphabet, Meta, Tesla and Nvidia). These mega-cap tech stocks have become increasingly important in determining overall market returns.
While we expect growth in AI and technology to continue, and companies exposed to this theme to continue to deliver returns for investors, whether we will continue to see the amazing returns we saw last year remains to be seen.
It’s been a positive start to the 2025 calendar year, but as always, it’s impossible to predict with certainty or consistency what will happen around the world, or how markets are likely to respond.
At Aware we keep a close eye on the factors which are likely to affect markets in the short-term, and consider how they might influence our outlook, and our returns going forward. However, we believe that the best response is to continue to focus on our long-term strategy, and focus on actively managing our diversified portfolio of quality assets to help deliver returns over the long term.
