With an anticipated shift to monetary easing, the resilience of consumers, and the possibility of increasing corporate activity, the market is expected to trade higher next year, indicating a “risk-on” environment for companies with positive earnings growth exceeding consensus, the manager noted.
“Consensus currently has low expectations for FY25 earnings growth in a market which is likely to be positive for business,” Paul Xiradis, chief investment officer and head of equities at Ausbil, said.
“We think that earnings will be better than expected by the market for FY25, and we are less focused on defensive names and more invested in growth and cyclical names to take advantage.”
Although the FY2023–24 reporting season was relatively weak, with pressures from still higher inflation, higher interest rates, and softness in China impacting many businesses, the fund manager believes that looking ahead to 2025, there will be “a number of factors” to provide relief for balance sheets.
“We expect to see the RBA commence easing their monetary policy in 2025, joining the Fed, ECB and other developed markets. This will add relief on the cost of debt and rollovers. As inflation has been falling, this will also add positively to income statements. Wages are still relatively in control,” Xiradis said.
Speaking on risks to earnings in 2025, he cautioned that geopolitics posed the most unpredictable risks, in particular he pointed to the war in the Middle East posing a risk to the price of oil and supply chains.
“The war in Russia and Ukraine carries some existential nuclear risks. These risks are unpredictable but at this stage we do not expect material market disruption. Further, under Trump we expect these risks to dissipate,” he said.
Resources sector
With decarbonisation and the energy transition remaining significant themes, Ausbil expects these trends to further drive value across resources, as well as energy, utilities and the mining services sector with respect to critical commodities.
According to Xiradis, the rapid normalisation of rates in 2023 and 2024 was “especially punishing” on commodities, given the impact on slowing economic growth. However, with an improved growth outlook for 2025, commodities are expected to “shift upwards again”.
Notably, copper is projected to experience increased demand underpinned by the decarbonisation theme, as well as demand from data centres with booming AI, and increased demand for electric vehicles and battery storage.
Xiradis was also slightly more optimistic on lithium and rare earths, predicting recovery after a tougher 2024 year, driven by battery storage and the electrification of things.
He pointed to IGO, Pilbara Minerals, Lynas Rare Earths and Sandfire Resources, alongside BHP and Rio Tinto, which also have major copper divisions, as key beneficiaries of this trend.
Cyclical names
According to Ausbil’s forecast, although the market is likely to see a “wide dispersion of opportunities”, an improved growth outlook will add potential for more cyclical companies. These include, beyond the resources sector, construction materials and consumer discretionary sectors.
“We have been incredibly selective in these cyclical sectors, with names such as Wesfarmers, James Hardie in construction materials, and Aristocrat Leisure,” the Ausbil chief investment officer said.
While exposure to banks and diversified financials is going to remain important in 2025, with Ausbil remaining overweight NAB and Macquarie Group, the fund manager also noted opportunities in the real estate sector.
Despite expectations of moderate cap rate compression the sector has benefited from rental ratchet clauses that capture inflation upside, and is expected to continue to benefit from higher rents in a lower inflationary environment.
However, the firm cautioned that the entire sector has been in a “long structural adjustment” following the rapid adoption of online since the pandemic.
“Goodman Group has been a preferred real estate exposure given that it is benefiting from two major thematics, the rise of smart logistics warehouses for online fulfilment and distribution, and the rapid uplift in demand for data centres,” Xiradis said.
Across other Australian sectors underpinned by key thematic, including technological transformation and the rise of AI, Ausbil favours “the enablers and businesses that increasingly operate in the digital environment” such as communications companies.
“The current secular expansion of data, cloud computing, AI and storage is driving huge investment in the enablers of change. This includes semiconductor providers like Nvidia and BE Semiconductors, a sector not available in Australia,” he said, highlighting Australia’s strength in other areas such as data centres, energy and energy storage that back up data processing, telecommunications and internet companies that support the web of connectivity and data.
“Examples of companies that stand to benefit include NextDC and Telstra,” he added.
Moreover, the companies leveraging networking and processing power offered by enablers to capture more business and customers at lower costs will be also well-positioned.
Examples of such companies include Block, REA, Life360 and WiseTech.
