As FY24 ends, balancing risk with opportunities is key for navigating economic challenges.
As we wrap up FY24, you would be right to think of the economy as a mixed bag – some areas are thriving, while others are struggling. Over the past quarter, we’ve seen the markets wrestle with stubborn inflation, shifting interest rates, and global political drama. But it’s not all doom and gloom. A strong job market and solid corporate profits give us a reason to be cautiously optimistic. The global scene is a swirling mix of tech breakthroughs, policy shifts, and regional differences.
Stepping into FY25, the dance between monetary policies and economic growth will be key to navigating challenges and seizing new opportunities; as long as we continue to watch the data for recession signs, we’re excited to see where the markets take us.
The new financial year demands a keen eye on balancing risks and rewards, keep reading to understand how fiscal decisions and market movements will shape our financial landscape – because with investing, fortune favours the prepared…
Australian Economy
Australia’s resilient labour market and rising home prices highlight regional economic vitality.
The Australian economy exhibited a blend of stability and challenge this past quarter. The Reserve Bank of Australia (RBA) maintained the cash rate at 4.35%, reflecting a cautious stance amid underlying inflation stabilising near 4%. This decision underscores the delicate balance the RBA aims to maintain between curbing inflation and supporting economic growth. Retail sales showed softness due to consumer sentiment being weighed down by speculation around further interest rate hikes, highlighting the sensitivity of consumer behaviour to monetary policy signals. You may have noticed your friends and family delaying major purchases like cars and home renovations, waiting to see if interest rates will drop. Despite this, the labour market remained strong with an unemployment rate around 4%, showcasing the resilience of the workforce amidst economic pressures.
Moreover, the housing market displayed regional disparities with overall home prices rising by 8% over FY24, driven by a supply shortfall and a surging population. Gains were concentrated in Perth, Brisbane, and Adelaide, reflecting varying degrees of economic vitality across the country. This growth in home prices occurred despite higher mortgage rates, indicating persistent demand in certain markets. The real estate sector’s performance reveals underlying confidence and structural demand, despite the broader economic challenges. As we move forward, the focus will be on how these dynamics evolve in response to both domestic and international economic conditions, and how they will shape Australia’s economic trajectory in FY25.
International Economy
Global growth varies widely, with tech advancements driving US gains and China’s economy facing hurdles.
Globally, economic conditions have shown varied performance, reflecting a variety of growth trajectories and challenges. The US economy demonstrated stellar growth, significantly bolstered by advancements in technology sectors, especially AI, leading to substantial gains in the stock market. Companies like OpenAI and Nvidia have seen their revenues soar as businesses across various industries demand their services as they start adopting AI technologies to improve efficiency and drive growth. This growth underscores the pivotal role of innovation and technology in driving economic expansion. However, the geopolitical tensions and recent elections in the UK and France have introduced volatility in the European markets, adding layers of uncertainty to the economic outlook. Despite these uncertainties, major European markets like Germany’s DAX and Britain’s FTSE 100 have reported gains for the year, showcasing resilience amid political and economic flux.
China’s economic performance, however, remained subdued with ongoing property sector issues and a lacklustre response to government stimulus efforts. The challenges in China’s economy highlight the complexities of managing growth in a post-pandemic world, where traditional levers of economic stimulation may not yield expected results. This has resulted in softer market performance, reflecting broader concerns about sustainable growth and economic stability in the region. The divergent economic landscapes across different regions emphasise the need for a nuanced understanding of global economic dynamics as we move into FY25, balancing the opportunities in high-growth sectors with the risks inherent in politically and economically volatile regions.
Australian Markets
Australian shares saw strong tech sector gains, but weak consumer spending and China demand pose challenges.
The Australian share market maintained a positive trajectory, returning 1% for June and a healthy 12% for FY24. This performance was driven by strong gains in the technology sector, which surged by 28%, and robust returns from healthcare and financials. Notably, Pro-Medicus, the healthcare software developer, emerged as the top-performing stock with an impressive 118.3% gain for the year, showcasing the market’s appetite for innovative and high-growth companies. Conversely, the energy sector lagged, weighed down by a 7.4% decline, reflecting broader challenges in the commodities market.
However, the overall market sentiment was tempered by external factors such as weak consumer spending and reduced demand from China for Australian iron ore. These challenges highlight the interconnected nature of the global economy and its impact on domestic markets. Despite these headwinds, large-cap stocks, particularly in the financial and healthcare sectors, provided stability and drove market performance. The Australian real estate investment trusts (REITs) faced pressures, returning -1.6% in June due to the threat of RBA rate hikes, though global REITs showed resilience.
The current backdrop of delayed rate cuts and an uneven recovery in China means the upside prospects of our local market is likely to remain less attractive relative to global equities in the short term. While global investors are chasing the IT growth story like marathoners at a water station, our local market’s small tech sector is like offering a sip of water bottle in the Sahara. It’s no wonder we’re seeing a bit of a mismatch in appetites.
Looking ahead, the Australian market’s ability to navigate these complexities will be crucial in sustaining its positive momentum into FY25. With tax cuts on the horizon and real wages growth expected, there are green shoots that hint at a rebound. However, the interplay of global economic factors, particularly the trajectory of Chinese demand and domestic policy decisions, will play a significant role in shaping the market’s future path.
International Markets
US tech giants lead global market gains, but geopolitical tensions and China’s issues create regional volatility.
Internationally, equity markets outperformed their Australian counterparts, reflecting strong performances across several key regions. The US stock market led the charge with a remarkable 22.7% return for FY24, driven by robust performances from technology giants such as Nvidia, Alphabet, and Microsoft. This surge underscores the significant impact of technological advancements and investor enthusiasm for innovation-driven growth. Japan’s Nikkei also posted substantial gains, benefiting from solid economic growth and market confidence.
US equity valuations are undoubtedly high, yet not worryingly so. Leading forecasts anticipate continued economic growth and potential Federal Reserve rate cuts, creating a supportive environment for the market. A recession is the only force we believe could alter this trajectory, and current indicators suggest that such an outcome is not an impending threat.
Emerging markets presented a mixed performance; while some regions capitalised on the global tech boom, others, particularly China, struggled with internal economic challenges. This highlights the importance of a strategic and nuanced approach to international investments, balancing high-growth opportunities with the inherent risks of regional economic instabilities. As we move into FY25, the focus will be on how these global dynamics evolve and influence market performance, emphasising the need for agility and informed decision-making in international investments.
Strategy Observations FY25:
Embrace Evolving Economic Trends
Global growth shows resilience as central banks cautiously ease policies, setting the stage for FY25 opportunities.
The journey through the latter stages of the global inflation fight was always destined to be complex, characterised by sticky inflation and central banks grappling to find the elusive ‘neutral rate’. Yet, amidst this challenge, glimmers of confidence are emerging. Central banks worldwide are cautiously stepping into easing territory. The Swiss National Bank’s bold moves in March and June, followed by Sweden, Canada, and Europe, signal a transformative shift. In the US, the market foresees two rate easing’s by the end of 2024, with the first potentially arriving in November. Australia, however, presents a different narrative, with cuts not anticipated until late 2025.
Despite the turbulence, global growth has shown remarkable resilience, driven predominantly by the US’s robust consumer spending and substantial manufacturing investments. This resilience, a hallmark of the post-COVID era, is expected to persist into 2025. As central banks ease monetary policies and a manufacturing upswing looms, we anticipate a modest reacceleration in global growth, creating a fertile ground for risk assets.
Geopolitical and Trade Dynamics
Geopolitical tensions and trade conflicts add inflationary pressures, but key trade dependencies offer opportunities.
Geopolitical tensions, particularly escalating trade conflicts, loom as significant risks. Governments’ efforts to ‘de-risk’ global trade and safeguard domestic industries continue to exert inflationary pressures. Geopolitical tensions continue to rise, proving once again that global trade negotiations are just like reality TV – full of drama, lots of yelling, and no one really wins. However, the landscape is not entirely fraught with peril. Key global trade dependencies, such as food and manufacturing, offer numerous constructive pathways forward.
Election outcomes pose additional uncertainties. For instance, candidate Trump’s proposed tariffs could radically alter trade dynamics, while the Biden administration’s policies might become less risk-averse post-election. Following the failed assassination attempt, prediction markets are heavily favouring Trump to win the election, which should be taken seriously given the potential impact on trade and economic policies. Nonetheless, the intricate web of global trade suggests that opportunities for positive developments remain robust.
Australian Market Prospects
Tax cuts and real wages growth may spark a market rebound, despite short-term headwinds.
The Australian equity market, while underperforming the US post-pandemic, has unique catalysts for recovery. Anticipated tax cuts and real wages growth are set to spark a rebound in Q3. However, the market faces short-term headwinds due to delayed rate cuts and an uneven recovery in China. Yet, domestic economic growth is expected to remain steady, buoyed by resilient sectors like mining, despite potential weaknesses in iron ore demand by late 2025.
Housing markets across Australia tell a tale of tight supply and strong demand. High mortgage rates have not dampened prices significantly, thanks to factors like strong net migration and limited property listings. This tightness, coupled with reduced construction activity, is expected to continue influencing the market, leading to varied price growth across regions. Politicians have their work cut out for them trying to avoid turning the Australian housing market into a game of musical chairs – where there will always be someone left standing without a place.
Asset Class Insights
Within private markets, private credit remains a top pick, thriving in a higher-for-longer rate environment and offering attractive risk-adjusted returns due to its structural seniority. However, careful manager selection is crucial to mitigate rising risks from competition, eroding spreads, and the increasing visibility of higher capital costs in legacy loan books. Private equity is starting to thaw, with exits and dealmaking showing signs of revival. As the timing of rate cuts becomes clearer, we expect liquidity pressures to ease and fundraising activities to ramp up, although near-term risks like elections and geopolitical tensions may slow recovery until late 2024 and into 2025. Hedge funds also play a vital role, offering portfolio diversification and uncorrelated returns amidst increased market volatility.
Infrastructure is our preferred real asset due to its defensive cash flows, often linked to inflation, and the significant investment tailwinds from the energy transition. The US commercial real estate market is stabilising, with property prices beginning to rise after a significant decline. We anticipate economic resilience and easing monetary policies will support this sector, with a bottoming out expected by year-end, though structural issues in office spaces will persist. Meanwhile, gold continues to shine as a safe haven, with analysts predicting a price peak in early 2025, driven by investor demand amid fiscal uncertainties and the upcoming US Presidential election, further reinforcing its enduring appeal.
Guiding Your Strategy Forward
In this ever-changing landscape, diversification continues to be the smart play. Yet the traditional safety net of negatively correlated stocks and bonds has frayed, demanding a more sophisticated approach to portfolio management. With bonds no longer the reliable fallback, it’s crucial to embrace diverse asset classes like infrastructure, private markets, and hedge funds to protect against market ups and downs.
As we navigate these shifting trends, we aim to continue delivering sharp, forward-thinking guidance, steering you through the intricacies of the global economy. The road ahead may be uncertain, but for those who stay informed and nimble, the opportunities are endless. Thank you for trusting us to help you stay ahead.
This post contains general advice and does not take into account your financial situation, objectives or needs. Before acting on this general advice you should consider if it is appropriate for you and your situation. We recommend that you obtain financial, taxation and legal advice before making any financial decision. Past performance is not a reliable indicator of future performance.
You should consider all factors and risks before making a decision. Please refer to our Financial Services Guide (FSG) for more information.