European equities outperformed other regions with the Eurozone showing strong gains, especially in the healthcare and financials sectors. The region benefited from a rotation away from US tech stocks, with semiconductor equipment makers experiencing volatility, but overall positive performance. The UK market was buoyed by large-cap energy, industrial, and financial sectors, although small and mid-sized companies faced volatility.

 

In the US, stock gains lagged other regions, as the AI market faced disruptions from China’s DeepSeek, a start-up offering a cost-effective AI model. This challenged US AI leadership, particularly for companies like Nvidia, affecting investor sentiment.

 

The ASX 200 was 4.6% higher in January. Nearly all of the ASX 200 sectors ended the month in positive territory except utilities, which was down 2.4%. The best performers were consumer discretionary (7.1%) and financials (6.1%). Commodities saw broad gains, with precious metals and agriculture posting the strongest returns.

 

Much has been said about the Trump administration increasing tariffs in the past two weeks. We are yet to see where the ball lands with all of this. The major implications of increased tariffs are reduced global trade and increased consumer costs. This may result in business uncertainty and increased share market volatility. The main indirect impact to Australia from tariffs is via lower commodity volumes and prices to China, as a result of disruption to Chinese growth (our main trading partner). A slowdown in the global economy would also be negative for Australian trade as we are a small, open economy. However, in this scenario, China is also likely to push through fiscal spending to offset any economic disruption to which Australian commodities would benefit. 

 

US payrolls have been mixed in January. The unemployment rate eased to 4% in January from 4.1% last month and wages growth was also stronger, up 0.5% over the month or 4.1% over the year. The US labour market remains in a solid shape and if it retightens significantly, this will prevent the Fed from cutting too much further.

 

US December quarter earnings season is still ongoing. Around 61% of companies have reported results. 77% of companies have surprised on the upside, above the long-run average of 76%. Annual earnings growth was up by around 10% in December and is expected to be up 13% in 2025.

 

Australia half-year (to February) reporting season has begun with 14% of companies now having reported results. Analysts have been downgrading profit expectations in the lead up to reporting season and expect basically flat profit growth in FY25, with a lot of the downside from the resource sector. The outlook statements from companies should show that better conditions are likely as the environment for consumer improves from lower inflation, the 2024 tax cuts and the high probability of near-term rate cuts.

 

After the double digit returns of 2023 and 2024, global and Australian shares are expected to be far more restrained in the year ahead. Stretched valuations, the ongoing risk of recession, the risk of a global trade war and ongoing geopolitical issues will likely make for a volatile ride with a 15% plus correction somewhere along the way highly likely. However, with central banks still cutting rates and the RBA joining in, the prospects for stronger growth later in the year should support profits. With Trump’s policies ultimately supporting US shares, this should still mean 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 in 2025 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 near-term softness as high interest rates constrain demand. Lower rates should help from mid-year.

 

Cash and bank deposits are expected to provide returns of around 4%, but they are likely to slow as the cash rate falls.