Geopolitical tensions, the aftershocks of a populist wave in Western elections, and the unpredictable policies of the new US administration of Donald Trump are all adding to a heightened sense of economic uncertainty.
Yet we are approaching 2025 with cautious optimism, expecting economic momentum to carry through from 2024. The labour markets in Australia and the US are robust, unemployment is low, and despite a slower-than-anticipated decline, inflation is edging closer to targets here and in the US, suggesting the possibility of easing financial conditions.
However, the Trump presidency will undoubtedly cast a shadow over the global outlook next year. Investors should be prepared for more volatility and headlines post-inauguration on 20 January as the president-elect’s proposed policies on trade and tariffs, expanded fiscal spending and deregulation, coupled with his “America First” agenda, will likely have profound implications for international relations and economic stability. The response of key US trading partners, particularly China, which will face higher tariffs on exports to US than other nations, will be crucial in shaping the global economic trajectory.
Looking ahead to 2025
While it’s too early to definitively predict the precise impact of these factors on the Australian share market and economy next year, we expect a period of heightened volatility and market sensitivity to political pronouncements and policy shifts. Investors would be wise to brace for unexpected events and prioritise a disciplined, long-term approach to portfolio construction.
Amid this uncertainty, we view the Australian small-cap market positively. After a protracted period of underperformance relative to their large-cap counterparts, small caps appear to be poised for a resurgence.
Aside from that, in the shorter term we think the first order derivatives of higher US fiscal spending, and higher rates for longer will see US dollar strength persist. This is likely to benefit Australian businesses with a high proportion of US dollar revenues.
Trump’s proposed tax cuts and pro-growth policies may also positively impact companies with pro-cyclical US exposure, as they could support US consumer spending in the short term. Examples of such companies include Aristocrat Leisure, Light & Wonder and Zip Co.
However, it is important to note that the long-term effects of these policies, including potential increases in tariffs and changes to immigration policies, could have mixed impacts on the US economy and global trade.
Reflecting on 2024 and lessons learned
This year defied expectations on several fronts. Geopolitical tensions, particularly the escalating conflict in the Middle East, failed to derail the bull market, and oil prices surprisingly softened. Global elections witnessed a surge in populism, but stock markets seemed unconcerned by the potential consequences of unchecked fiscal spending in the US next year and declining productivity. Perhaps most surprisingly, the anticipated wave of US Fed interest rate cuts did not happen to the extent predicted by financial markets.
Despite these surprises, the global economy demonstrated resilience, as did the Australian and US economies. Consumer spending remained robust for much of the year, defying predictions of a downturn. However, recent corporate reports suggest that this resilience may be waning, with several sectors signalling a softening in consumer demand in Australia.
The slowdown in the Chinese economy, despite improving trade relations with Australia, impacted export-oriented sectors like commodities, tourism and education. The drag of slowing growth in China could continue in 2025. Sticky domestic inflation, driven by increased fiscal stimulus and government spending, has also created challenges.
On the other hand, the artificial intelligence (AI) and technology sectors provided strong tailwinds. The ASX 200 technology subsector delivered impressive returns, outperforming the broader index significantly. While the long-term prospects for AI remain promising, it is important to acknowledge that current valuations may be driven more by hype than concrete profitability.
As a result, we believe that it remains important for investors to embrace a disciplined approach and focus on quality investments with strong fundamentals and a margin of safety to withstand volatility. Investors will need to stay informed and closely monitor geopolitical developments, policy changes and economic indicators while exploring opportunities in potentially undervalued segments of the market, such as small caps.
Shawn Lee, portfolio manager, SG Hiscock & Company
