December 2024, Quarterly Investment Commentary
Share markets finished 2024 near all-time highs after delivering strong double digit returns for the 12 months ending 31 December (Australia 7% and Global +26%). These gains were driven primarily from expectations for a soft economic landing, start of the interest rate cutting cycle and confidence in US President elect Trump’s pro-growth policy platform. However, not all economies and markets are in the same phase of growth, inflation and interest rate cycle. For example, Australia is lagging other developed markets like the US and UK in both the inflation and interest rate cycle and is under exposed to structural growth trends.
Our macroeconomic outlook for 2025 is that a multi-year investment cycle in Artificial Intelligence (AI), energy transition and onshoring will support broader economic activity and corporate earnings growth. These trends will be particularly strong for the US share market and support productivity growth. However, inflation and interest rates will remain higher than in the last decade due to labour constraints, infrastructure duplication and imposition of trade tariffs. There remain a range of risks including geopolitical escalations, sticky inflation and correspondingly less accommodative monetary policy.
Elevated share prices and company valuations weigh on our expectations for share market returns over the next year when compared to the same time last year. Earnings growth is still expected to be strong in markets like the US (+10%) but Australian corporate earnings growth is more modest (+4%) given the weightings to banks (top of the cycle earnings) and resources (low growth). Areas where we think there is latent potential includes small caps and private equity.
Defensive fixed income assets remain attractive, with high cash yields and low corporate defaults contributing to a high single digit return expectations. This is particularly attractive for income-oriented portfolios, but also has a role to play to dampen volatility in growth-oriented portfolios.
Asset Class Perspectives
Australian Equities
Beneficiary of inflationary environment via exposure to Financials and Resources. Remains a source of defensive dividend income streams from industries such as Consumer Staples and Infrastructure.
International Equities
Exposure to high quality companies, with leading market positions and pricing power that are leveraged to structural growth trends. Key sector exposures include Infrastructure, Healthcare, Technology, and Communications.
Currency (USD)
We are biased towards currency hedged funds, as the AUD is trading towards the low end of its historical range, is a cyclical beneficiary of rising Australian rates relative to US rates.
Fixed Income
Higher base cash rates make fixed income the most attractive relative to equities in 15 years. We prefer a mix of government bonds, investment grade corporate bonds and loans, property backed securities and private credit.
Cash
We have recently lowered our cash levels to take advantage of more attractive fixed income yields.
Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. December 2024
Contact: Financial Decisions PO Box 484 Mona Vale NSW 1660, T 02 9997 4647