•Global shares returned 13.8% in local currency terms over 2024-25, with a fall in the $A boosting this to 18.6% in $A terms. Chinese, US and Eurozone shares outperformed with the US getting a boost late last year and Europe outperforming in the last six months.

 

•Australian shares also returned 13.8%, helped by the positive global lead and move to lower interest rates with IT, financial and telcos outperforming but resources stocks falling on trade war worries.

 

•Australian real estate investment trusts returned 14% with global REITs returning 7.9%.

 

•Unlisted commercial property returns look to have turned positive after the drag from higher bond yields and work from home.

 

•Australian and global bond returns were strong as yields fell partly on the back of rate cuts.

 

•Cash returned 4.4% helped by the rate hikes that started in 2022.

 

•Australian home prices rose just 3.4%, with a soft patch late last year, although there has been a reacceleration since February on the back of rate cuts. Gains were again strongest in Perth, Brisbane & Adelaide.

 

The past financial year provided several lessons for investors. First, in the absence of recession a bear market is shares is unlikely. Second, falling inflation and interest rates are positive for shares. Third, Trump still faces constraints from financial markets, US consumers and Republican politicians, and he will back down if financial markets weaken too much. Fourth, while wars in the Middle East are unsettling for markets, they won’t have any significant impact unless oil supplies are disrupted and finally, the last year was another reminder of just how hard it is to time markets. Shares plunged into April leaving sentiment depressed, just when they bottomed only to make new highs in June.

 

There are numerous risks for investment markets in the year ahead so investors should expect further volatility and a more constrained return:

 

•Trump’s tariff threat is at high risk of flaring up again - with the 9th of July pause deadline near and more sectoral tariffs set to be announced. More trade deals may soon be announced but the 20% tariff agreed with Vietnam does not augur well and that or even higher could become the norm for some including Europe and Japan. The 10% general tariff on Australian goods is likely to stay.

 

•US public debt sustainability – concerns on this front could flare up again as the One Big Beautiful Bill (tax cut) Act even with tariff revenue looks set to keep the budget deficit around 6 or 7% of GDP and lead to a further rise in already high level of public debt. This in turn could accelerate the decline in the $US and put upwards pressure on US bond yields. Any move by Trump to undermine the Fed’s independence could accentuate this.

 

•Geopolitical risks also remain - including around Iran’s nuclear weapons program which look to have been setback but not entirely wiped out, ongoing US/China tensions and the war in Ukraine.

 

•US share gains have had a high reliance on tech stocks - and in particular Nvidia, which leaves them vulnerable should sentiment towards tech weaken significantly.

 

•Earnings expectations are at risk - in both the US and Australia with softer than expected economic growth lately.

 

•Shares are overvalued - trading on high price to earnings multiples and offer a low-risk premium over bonds compared to the last two decades. This is particularly the case for US shares but also to a lesser degree for Australian shares. By contrast Eurozone shares are offering better value.

 

All of which could contribute to a new bout of share market weakness going into the seasonally weak months of August and September. So, another 15% or so correction is possible. However, similar things could have been said a year ago and financial year returns turned out to be strong. While the near-term outlook for shares is still messy, shares should benefit on a 6-12 month view as Trump pivots towards more market friendly policies to help Republicans do well in next year’s midterm elections, the Fed starts cutting rates from September (and possibly this month) and other central banks including the RBA continue to cut rates.

 

Our base case is for continued volatility and more constrained returns after three years of strong gains, but returns are still likely to be reasonable.

 

 

Sources: AMP Capital, Bloomberg, Pendal, Zenith.