Persistent inflation, high interest rates, and ongoing geopolitical tensions have combined to create a more volatile and complex environment compared to the beginning of the previous financial year.
As the 2024–25 financial year kicks off, investors are reflecting on a period of robust returns and pondering what lies ahead amid changing economic landscapes and global uncertainties.
The past year saw impressive gains in global equity markets, particularly in the US, where shares surged approximately 25 per cent. Global shares followed closely at 21 per cent, while Australian shares posted a solid 12 per cent increase.
In contrast, cash returns averaged 4.5 per cent and bonds offered modest yields of 2–3 per cent, while unlisted commercial property remained negative as office valuations remained under pressure.
In his latest note, AMP chief economist Shane Oliver attributed the strength in shares over the 2023–24 financial year to several key factors: the anticipation of lower interest rates driven by decreasing inflation, stronger-than-expected economic activity and profits, particularly in the US, and a surge of enthusiasm for AI in the US market.
“Australian shares did well but were relative laggards on the back of ongoing China worries and concerns about the impact of rate hikes on Australian households,” Oliver said.
But, looking ahead, the chief economist predicted a rocky ride for markets.
“More constrained and more volatile returns are likely over the 2024–25 financial year reflecting: poor valuations evident in the narrow earnings yield less bond yield gap; elevated levels of investor sentiment; and technically overbought conditions with narrowing breadth in the critical US market at a time when Nvidia and the tech sector is seeing some wobbles,” Oliver said.
He also cited “high geopolitical risks”, particularly in France and the US.
Reflecting on the first presidential debate between President Joe Biden and his opponent Donald Trump, Oliver noted that it highlighted the significant risk of a renewed trade war if Trump is re-elected. Biden’s “shaky performance”, he said, did not improve his prospects, especially at a time when Trump is already leading in the polls.
All of this, the economist said, leaves shares globally, and in Australia, at risk of another correction.
“The risk of another rate hike in Australia before cuts commence will likely see the Australian share market remain a relative underperformer. July is often a solid month seasonally, but August and September are seasonally weak months.
“That said, despite the risk of another correction, we continue to see further gains in shares this year as disinflation continues, more central banks including the Fed join in cutting rates and as recession is avoided or proves mild.”
Oliver added that AMP expects the ASX 200 to return 9 per cent this year and end the year around 7,900.
“Bonds are likely to provide returns around running yield or a bit more, as inflation slows, and central banks cut rates,” the economist predicted.
“Unlisted commercial property returns are likely to remain negative again due to the lagged impact of high bond yields and working from home.”
Cash and bank deposits are expected to provide returns of over 4 per cent, he said, while tipping that a rising trend in the Australian dollar would likely take it to US$0.70 over the next 12 months.
