What to expect in 2025: market outlook

We expect 2025 to be the year of moderation – marked by slower growth, lower (but still positive) equity market returns, stagnating inflation and declining interest rates. While moderating, markets will be anything but boring; shaped by global trade wars, mixed economic data, divergent fiscal and monetary policy settings and aggressive money flows.

Global tensions: What could go wrong, or right?

The portfolio is defensively positioned for the first quarter of 2025, anticipating the resurgence of trade wars driven by Trump’s return to office and his commitment to imposing significant tariffs. Markets do not appear to be pricing this potential disruption and should there be any retaliatory measures from China and the EU it could be a rocky start to the year for risk assets. 

The tariffs are seen as a tool for negotiation so headlines will be worse than reality. Tariffs are also pitched to fund proposed tax cuts, though their consumer impact raises questions about their long-term effectiveness. As a risk currency, we expect the AUD will remain under pressure through the beginning of 2025.

Geopolitically, attention will shift from Russia/Ukraine to tensions in the Middle East, particularly Iran, where oil strikes, US sanctions and further disruptions to shipping lanes should provide a floor for oil prices. The key unknown is OPEC+’s strategy; if they move away from efforts to prop up prices and instead increase production to capture market share, this could be an unpriced tail event for global oil supply. 

The WAM Leaders investment portfolio only has small exposures in Woodside (ASX: WDS) and Santos (ASX: STO) currently but given market positioning is also negative and equity valuations are compelling, this is a sector we are monitoring closely.

China: The invisible hand of Australia's GDP

While China sentiment is unlikely to improve in early 2025 amid tariff headlines, it may be an opportunity to build positions in resources stocks ahead of the National People’s Congress in March. 

Once tariff headwinds are known, we expect large-scale China stimulus measures will be announced, targeting domestic consumption and infrastructure with the aim of stabilising growth and addressing demographic challenges. Opportunities in China include consumer-facing stocks such as Treasury Wine Estates (ASX: TWE) and A2 Milk (ASX: A2M), and resource companies such as Rio Tinto (ASX: RIO) and South32 (ASX: S32), which will benefit from the country’s demand for aluminium and copper.

Valuation mean reversion: probable or a pipe dream?

The ASX Big Four banks have had a tremendous run in 2024. Commonwealth Bank (ASX: CBA) is now trading at 3.5x Price to Book value, while writing loans at cost of capital, worth 1x book value. 

CBA’s dividend yield of 3% now pales in comparison to the 4.5% return you could earn in a CommBank term deposit. 

While they are great businesses, this does not represent value to us. Should there be sharp money flow reversals in the banking sector, which represents more than 25% of the ASX market cap, there will be significant alpha opportunities. We have a preference for undervalued companies with strong asset backings such as Spark New Zealand (ASX: SPK), Telstra (ASX: TLS), Dexus (ASX: DXS) and Challenger (ASX: CGF).

This is our current views on key market debates, however stay tuned in early 2025 as we dive deeper into each of the key drivers of markets. All in all, 2025 is shaping up to be a year of significant volatility, and therefore significant opportunity.