Will Goldlocks make a return in 2025?

Another Goldilocks Year: 2024 in Review

The following is a summary of a recent article posted by Dr Shane Oliver (AMP)…

2024 unfolded much like a rerun of 2023—marked by uncertainty and apprehension, but ultimately delivering positive outcomes. Here are the key themes that shaped the year for investors:

1. Stronger-than-Expected Growth
   Once again, fears of a global recession proved unfounded. Despite monetary tightening in 2022 and 2023 and China's property market struggles, global growth managed to exceed 3%. In Australia, while a "per capita recession" took hold, overall economic growth remained positive at around 1%. This modest performance was bolstered by strong population growth, higher-than-expected public spending, and labor hoarding, which helped mitigate the impact of mortgage stress on households.

2. Global Divergence
   Economic growth varied significantly across regions. Among emerging markets, India led with impressive 6.5% growth, followed by China at a slower 4.8%. Meanwhile, South America and the Middle East saw subdued growth at around 2%. Developed economies also displayed divergence: the US grew strongly at 2.8%, Europe lagged at 0.8%, and Japan eked out a modest 0.3%.

3. Further Disinflation
   Inflation continued its downward trajectory. In major economies, inflation rates dropped sharply from their 2022 peaks of 8–11% to a more comfortable 2–3% range in 2024. Australia, however, remained behind the curve, both in the earlier inflation surge and its subsequent decline.

4. Falling Interest Rates
   While the shift to lower interest rates took longer than anticipated, major central banks began easing monetary policy by cutting rates. Although these reductions were not as significant as initially expected, they marked a clear shift. The Reserve Bank of Australia (RBA) is likely to follow suit in early 2025.

5. Muted Geopolitical Risks
   Geopolitical fears, though prominent, had less impact than anticipated. The conflict in Israel expanded to include Lebanon and limited missile exchanges with Iran, but oil supplies remained unaffected, leaving prices largely stable. Similarly, heightened tensions in the US-China "Cold War" caused no major disruptions, and Donald Trump’s re-election provided a boost to US equities.

2024 Performance Highlights…

1. Global Shares:

   • Strong performance driven by falling rates and robust corporate profits.

   • US shares outperformed due to a stronger economy, tech dominance, and pro-business policies.

   • Non-US shares lagged, especially in the Eurozone (impacted by political uncertainties) but Chinese shares benefited from stimulus measures.

2. Australian Market:

   • Shares performed well on profit growth and anticipated rate cuts but faced challenges from China-related concerns.

   • Home prices showed mixed results, with gains stalling due to high interest rates and falling in some cities.

3. Bonds and Real Assets:

   • Government bonds faced constrained returns due to limited rate cuts.

   • Real estate trusts saw solid gains anticipating better commercial property returns.

   • Unlisted assets struggled due to high bond yields and declining demand for office spaces.

4. Currency Movements:

   • The Australian dollar weakened against the US dollar, influenced by US tax cuts, deregulation, and trade policies.

5. Super Funds:

   • Balanced funds posted strong returns, doubling expectations for the second consecutive year.

Key Risks for 2025…

1. Valuation Concerns:

   • US share valuations are stretched (26x forward PE), with negative earnings yield gaps. Australian valuations (20x) are somewhat better but not cheap.

2. Policy and Economic Risks:

   • Uncertainty over the extent of rate cuts by central banks (Fed, RBA, etc.).

   • Potential for rising bond yields to pressure equity markets.

   • Recession risks, particularly in the US and Australia, if rates remain too high.

3. Trade and Geopolitical Risks:

   • Possibility of a global trade war, especially with escalating US tariffs targeting Europe and Asia.

   • Chinese economic challenges compounded by tariffs and modest stimulus.

   • Heightened geopolitical tensions (Ukraine, Iran, China) and political uncertainties in Europe and Australia.

Reasons for Optimism…

1. Inflation Trends:

   • Inflation expected to decline as labor markets ease and commodity prices trend down.

2. Monetary Policy:

   • Central banks likely to continue rate cuts, supporting economic recovery.

   • RBA projected to lower rates to 3.6% by year-end 2025.

3. Moderate Global Growth:

   • Global growth forecast at just below 3%, with key contributions from:

     • US (2.5% growth), aided by pro-growth policies.

     • China (5% growth), supported by additional stimulus.

   • Recession risks, if realized, are expected to be mild.

4. Resilient Business Conditions:

   • Global business surveys indicate stable growth prospects.

5. Trump's Economic Policies:

   • While Trump’s policies will create a lot of uncertainty and disruption as he uses tariffs and other measures as part of a maximum pressure strategy to negotiate better outcomes for the US, his first term as President indicates that strong economic growth and share price stability are top priorities for him. along with the desire to reduce the cost of living - this could lead to a strong focus on tax and efficiency policies.

Investment Implications…

1. Equities:

   • Global and Australian shares to deliver constrained returns (~7%), with potential for significant volatility (e.g., a 15% correction likely during the year).

2. Bonds:

   • Modest returns expected, aligned with slowing inflation and rate cuts.

3. Property:

   • Unlisted commercial property returns may improve as the sector adjusts to prior price declines.

4. Australian Housing:

   • Further weakness in the first half, with a potential 3% price rise by year-end as rates ease.

5. Cash and Deposits:

   • Returns over 4%, though they may decline later in the year.

6. Currency:

   • Australian dollar likely to fluctuate between $US0.60 and $US0.70, influenced by interest rate differentials and trade tensions.

Key Areas to Monitor…

• Interest rate trends.

• Recession indicators.

• Trade war developments.

• China's property market stability.

• Australian consumer behavior.

Disclaimer
This document has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.

Rick Maggi CFP, Westmount Financial, Financial Advisor (Perth)