More volatile and constrained – the macro investment outlook for 2025

• Stronger than feared growth and profits. This was despite “high” interest rates, China worries and weak conditions in Europe.
• Global divergence. US growth was strong, Europe and Japan soft.
• Further disinflation. Inflation in major countries, including Australia, has fallen from peaks of 8 to 11% in 2022 to around 2 to 3%.
• Falling interest rates. The RBA lagged but should start early this year.
• Geopolitical threats failed to dent investment markets.

• Shares are expensive, with the key US share market trading on a 26x forward P/E and offering no earnings yield pick up over bonds. Australia is not so bad at 20x but it’s not cheap either.

1. Inflation is likely to continue to trend down as labour markets are continuing to ease, demand growth is still slowing and commodity prices remain well down from their 2022 high.
2. Central banks are likely to keep cutting rates. This is likely to range from the Fed likely cutting to 3.75-4% to the ECB which is likely to cut to 1.5%. This is likely to include the RBA where quarterly trimmed mean inflation is likely to have dropped to around 0.5-0.6% quarter-on-quarter in the December quarter (2.4% annualised or less), likely enabling it to start cutting in February. The recent fall in the Australian Dollar being less severe on a trade weighted basis is unlikely to add much to inflation and so is unlikely to stop the RBA cutting, unless it falls a lot further.
3. Global growth is likely to slow but only to just below 3%, with some strengthening in the second half helped by rate cuts. Australian growth is likely to edge up to 1.8% helped by rising real wages, tax cuts and rate cuts and this should see profit growth return.
4. If recession does occur it’s likely to be mild as most countries have not seen a spending boom that needs to be unwound and traditionally makes recessions deep. And the Chinese government is likely to continue to do just enough to keep growth around the 5% level.
5. Finally, while Trump’s policies on tariffs, will create a lot of uncertainty and disruption which could trigger a correction, his first term as President tells us he ultimately wants to see US shares up. He was also elected on a mandate to get the cost of living down for Americans, not push it up. This could ultimately mean more of a focus on tax and efficiency policies (which would be positive for shares) as opposed to tariffs. Similarly, bond market vigilantes and the 38 fiscally conservative House Republicans who voted against Trump’s debt ceiling extension will limit how much he can raise the budget deficit.

• After the double digit returns of 2023 & 2024, global and Australian shares are expected to return a far more constrained 7% in the year ahead. Stretched valuations, the ongoing risk of recession, the likelihood 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. 
• But central banks are still cutting rates with the RBA joining in, prospects for stronger growth later in the year supporting profits, and Trump’s policies ultimately supporting US shares, 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, and we see average home prices rising around 3% in 2025.
• Cash and bank deposits are expected to provide returns of around 4%, but they are likely to slow in the second half as the cash rate falls.
• The Australian Dollar is vulnerable to more downside against the US Dollar with a risk it falls below $US0.60 as the RBA cuts by more than the Fed, US tariffs support the US Dollar and iron ore prices remain soft. Its more a strong US Dollar story though than a weak Australian Dollar story and so its fallen by much less on a trade weighted basis (down 5% since end 2023 versus down 10% against the US Dollar) resulting in less of threat to inflation.

6 things to watch

1. Make the most of compound interest to grow wealth. Saving regularly in growth assets can grow wealth significantly over long periods. Using the “rule of 72”, it will take 16 yearsto double an asset’s value if it returns 4.5% pa (ie, 72/4.5) but only 9 yrs if the asset returns 8% pa.
2. Don’t get thrown off by the cycle. Falls in asset markets can throw investors off a well-considered strategy, destroying potential wealth.
3. Invest for the long-term. Given the difficulty in timing market moves, for most it’s best to get a long-term plan that suits your wealth, age and risk tolerance and stick to it.
4. Diversify. Don’t put all your eggs in one basket.
5. Turn down the noise. We are increasingly hit by irrelevant, low quality and conflicting information which boosts uncertainty. The key is to avoid the click bait, turn down the noise and stick to a long-term strategy
6. Buy low, sell high. The cheaper you buy an asset, the higher its prospective return will likely be and vice versa.
7. Avoid the crowd at extremes. Don’t get sucked into euphoria or doom and gloom around an asset.
8. Focus on investments you understand offering sustainable cash flow. If it looks dodgy, hard to understand or has to be justified by odd valuations or lots of debt, then stay away. There is no free lunch!
9. Seek advice. Investing can get complicated.