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Markets continued their upwards annual trend in November with the ASX 200 rising 3.8% and the MSCI World Ex AU increasing 5.2%.

Shares remain in a battle between the negatives of rich valuations, higher bond yields, uncertainty as to how much central banks will cut rates and uncertainties around Trump’s trade policies and geopolitical risks on the one hand versus the positives of global central banks being in an easing cycle, goldilocks economic conditions particularly in the US, optimism that Trump will reinvigorate the US economy and prospects for stronger profits ahead in Australia. We are also now in a seasonally strong period of the year for shares. Our overall assessment remains that the trend is still up, including for Australian shares, but expect a more volatile and constrained ride.

Growth in Australia is dismal. While the September quarter GDP data was not all bad as it did show a lift in household income and savings potentially supporting a future pickup in consumer spending, it was mostly pretty dismal: growth came in softer than expected at just 0.3% QoQ; annual growth slowed to 0.8% YoY, its slowest outside the pandemic since the early 1990s recession. Were it not for strong growth in public demand and strong population growth Australia would be in recession as the former is partly offsetting the near recessionary conditions in private spending and the latter is keeping the economy growing despite the fall in GDP per person. This scenario presents 3 big problems:
 
1) the fall in per capita GDP is an indicator of falling living standards per person in      Australia
2) the surge in public spending to a now record 28% of GDP has made the RBA’s job in controlling inflation harder
3) the surge in public spending is exacerbating Australia’s productivity slump with productivity down another 0.8% over the last year
 
All this means that we see a higher chance of a February rate cut (around 50%) and its quite likely that RBA commentary in the week ahead becomes a bit more dovish to allow for that possibility. Consistent with this, money market expectations have become less hawkish (again) and now see a 55% chance of a cut in February with one now fully priced in for April, whereas a week ago that wasn’t the case till May.
 
I thought that we could spend a little time reflecting on last year and looking forward to next year. There were a few bumps along the way for shares, notably with an inflation scare in April and a growth scare into August, but they were relatively minor (with brief falls in shares of less than 10%). For diversified investors 2024 was another strong year.
 
Global and Australian shares returns are expected to be far more constrained in the year ahead. Stretched valuations after two strong years, the ongoing risk of recession, the likelihood of a global trade war and ongoing geopolitical issues will likely make for a volatile ride in 2025 with a 15% correction somewhere along the way highly likely. Central banks still cutting rates with the RBA joining in and prospects for stronger growth later in the year supporting profits should still see okay investment returns.
 
Bonds are likely to provide returns around running yield or a bit more, as inflation slows to target and central banks cut rates.
 
Unlisted commercial property returns are likely to start to improve next year as office prices have already had sharp falls in response to the lagged impact of high bond yields and working from home.
 
Australian home prices are likely to see further weakness over the next six months as high interest rates constrain demand and unemployment rises. Lower interest rates should help from mid-year.
 
Cash and bank deposits are expected to provide returns of over 4%, but they are likely to slow in the second half as the cash rate falls.
 
We take this opportunity to wish you a happy and safe holiday season and look forward to a successful 2025.
 
Important note: While every care has been taken in the preparation of this document, Farrow Hughes Mulcahy make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. 
 
Source: AMP Capital, Zenith.