NEWS + VIEWS – 17/01/2025
MARKETS
December was a negative month for the ASX 200 while the US S&P 500 was almost flat. The seasonal short-term sell-off in January hasn’t occurred this year yet, as any downward trend has been very short and very shallow.
Markets have a keen eye on the early actions in the Trump presidency, particularly around tariffs. Domestically, the Reserve Bank’s interest rate decision in February is the next major event, closely followed by the Federal election.
PREDICTIONS
It’s that time of year to be foolhardy and attempt to predict what might happen over the next 12 months. Last year we described it as predicting the unpredictable and that hasn’t changed.
WHAT WE PREDICTED FOR 2024
We were mostly right on macro projections but missed badly the ‘rocketing’ US share market. The domestic banks’ stellar performance also caught us and everyone else by surprise.
Geopolitical
Conflicts in the Middle East and Ukraine have continued as we expected but economically, they have had limited economic impact beyond the parties fighting. At the same time, we expected China to continue its attempts to push influence into the Pacific and its aggressive actions in the South China Sea. We expected President Biden to have a narrow victory over Trump. In the end, Biden didn’t even stand after a ‘last minute’ exit due to his waning mental capacity.
Inflation, growth and interest rates
US official interest rates ended the year at 4.25% to 4.50%. which was just above our prediction of 4.00% to 4.25%. We will take that as a ‘win’ as many pundits were predicting larger cuts. We expected rate cuts of 0.50% domestically but in the end, there was not a single cut. Federal and State government over spending is holding up inflation and rates.
Economic growth in the US was significantly stronger than we expected. On the other hand, Australia’s and China’s economies fumbled along with expected low growth. In fact, domestically it was probably negative on a per capita basis. Employment held up in Australia due to NDIS and other government spending. Small business closures are at record levels and strikes increased as predicted. New gas project announcements have been absent as expected and larger companies are looking to friendlier investment environments such as the US.
Share markets
We predicted that the S&P 500 would hit 4,850 (or rise by 2%). That was a big miss as the index had a stellar year and finished at 5,882. Technology stocks were the ‘overachievers’. Domestically, the ASX 200 closed the year at 8,231 compared to our ‘under quote’ of 7,800. Banks were the standouts. Australian market rises were almost all valuation ones (Price/Earnings in green) as profits (Earnings Per Share in grey) were muted at best (see chart below). The US on the other hand had strong company profit rises coupled with valuation rises.
Market rises were steady, with corrections of 6% domestically and 8.5% in the US in August being the most volatile period. We predicted a 10% correction at some time in 2024.
On a sector level, miners struggled more than expected while forecasts for energy company weakness eventuated. Defensive industrials delivered dividends but not much if any capital gain as we thought. Woolworths (WOW) was the big underachiever. The banks were the big surprise with strong share price rises at the same time as their earnings fell.
PREDICTIONS FOR 2025
Geopolitical
The Middle East will ‘stabilise’ as a much-weakened Iran loses its proxy fighters and the Gaza ceasefire is agreed, which is not to say that the Middle East will be ‘stable’ as the Gaza conflict could reignite. Ukraine and Russia will agree to a ceasefire with Russia keeping almost all of its invaded Ukraine territory.
China will remain aggressive in the South China Sea, and particularly towards Taiwan. A trade war with the US will ‘break out’ as tariffs are imposed. China will look to locate manufacturing in countries not subject to tariffs.
Europe will continue its ‘pull back’ of emissions goals as energy and broader economic problems are exacerbated. Trump tariff proposals will intrude volatility into markets, but the eventual tariff result will be less than ‘ambit’ claims that were announced during the US election.
Domestically, the Federal opposition will make significant gains in seats in the upcoming election, but Labor will struggle to get an absolute majority. A Labor power sharing agreement with remaining Teals is quite possible.
Inflation, growth and interest rates
Inflation will remain sticky in the US, but we are predicting a 1% interest rate cut by the end of the year as labour markets become softer and inflation approaches its target range.
Domestically, our economy is weakening (offset by outsized government spending), which will result in falling inflation. The first cut in interest rates will happen in the first half of the year with official rates down by 0.70% to 3.65% by the end of the year. The Federal and State debts will ‘blow out’.
Australian GDP growth will remain anaemic with rising energy costs, poor productivity, regulation and government spending crowding out private sector investment. US growth will stay solid and China growth will improve but the property market and demography will continue to drag.
Share markets
The 12-month forward Price/Earnings (P/E) for US markets opened the year at 26 times. In Australia, it is a little lower at 20 times. Both look expensive suggesting more volatility over the year. Possibly the first ‘challenge’ will be the announcement of the imposition of tariffs on China and to a lesser extent Europe, Canada and other trading partners. This will be followed by negotiations and the final result will be less tariffs than first announced. Share markets will have at least one 10%+ correction during the year.
We predict that the ASX 200 will benefit from lower interest rates to finish the year up 6% at 8,649 implying an overall 10% return when dividends are included. In the US, despite looking expensive but not in bubble territory, we predict that the S&P 500 will continue its strong run and finish the year up 7% at 6,300.
At a sector level, banks trading at a P/E of 19 times versus a more usual 14 times without earnings growth suggests that they are overvalued. Nevertheless, strong dividends are making the banks attractive. Share prices will experience limited if any gains due to outsized rises in 2024. Low bad and doubtful debts and a benign economy are needed to maintain the bank share prices.
Large LNG, oil and coal energy companies’ share prices should recover and dividends will remain healthy. The exception could be the east coast producers where gas shortages could mean governments impose retention ruled on larger exporters. The trend to move capital offshore for these producers will continue. Government intervention and activist lawfare will continue. The regulatory environment for energy retailers will be very difficult due to political focus.
Non-discretionary retailers will have a difficult start to the year although share prices may improve if interest rate cuts are large enough. Non-discretionary retailers will continue to struggle under political scrutiny and dividends will be the main return for the year.
Telecommunications companies will keep dividends constant and provide some capital growth. Cost control will be all important. Other ‘infrastructure’ style companies such as Transurban (TCL) will benefit from lower rates and possibly provide some increase in dividends.
The major miners (particularly iron ore producers) will benefit from China stimulus measures in an attempt to boost its languishing economy. Low cost ‘electrification’ minerals companies (e.g. lithium producers) will possibly experience a rebound as oversupply wanes. Higher cost producers will be bought or close down.
Parts of the health care sector should have a better year. However, we would steer clear of companies reliant on government setting (e.g. health insurers). Health care is an area where innovation and technology could play a strong role and can be a defensive sector in volatile markets.
The property sector (REITS) will experience some recovery from lower interest rates. Logistics and possibly some retail property funds will benefit. Higher quality office investments in more favourable State Government settings will do better.
Gerard O’Shaughnessy
P 0423 771 330
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