Markets – January 2024
The Australian share market faced a challenging December 2024, with the ASX 200 Index ending the month on a downward trend after retreating from its recent record high. Most sectors experienced declines, with only the consumer staples and energy sectors delivering positive returns. Real estate was the worst-performing sector.
Key Factors Influencing December’s Performance:
- Federal Reserve Decision: The U.S. Federal Reserve lowered policy rates by 25 basis points and adopted a more hawkish tone. Chairman Jerome Powell warned that the ongoing strength in the U.S. economy might result in fewer rate cuts than expected in 2025. Some analysts are now discussing the possibility of a rate rise in the U.S.
- Employment Data: Strong November employment data in Australia, with 35,600 jobs added and unemployment falling to 3.9%, increased uncertainty about potential RBA rate cuts.
- Rising Long-Term Bond Yields in the U.S.: The ten-year bond rate rose from 4.3% to 4.6% by the end of the month.
2024-2025
2025 Outlook for Australian Equities:
The outlook for Australian equities in 2025 is generally positive, with expectations of moderate returns and potential opportunities in specific sectors.
Key Points:
- Market Performance: The ASX 200 is expected to reach 8600 by the end of 2025, with a return to 10% earnings per share growth.
- Economic Backdrop: Australia’s economic growth is set to improve in 2025, supported by global monetary easing and ongoing low unemployment. The Reserve Bank of Australia is expected to join other central banks in cutting interest rates, benefiting equities.
Sector Opportunities:
- Resources Sector: Likely to rebound if China implements further stimulus measures.
- AI Adoption: Reshaping corporate Australia, potentially driving productivity improvements and benefiting adjacent industries like data centres and software companies such as Wisetech.
- Office Sector: Investor sentiment is turning positive. In the nine months to the end of September, more than $7 billion of offices changed hands, up 48% from last year. Analysts expect rental growth of 7%, mainly driven by a reduction in incentives in Sydney, Brisbane, and Melbourne.
- Valuation Dispersion: Significant valuation dispersion across sectors presents opportunities for value-focused investors.
Challenges:
- Geopolitical Pressures: Domestic and international challenges may impact market performance.
- Policy Implications: Caution exists regarding the policy implications of the new Trump Administration in the United States.
- Valuation: The Australian equity market trades at a price-to-earnings (PE) ratio of approximately 20x and a yield of around 3.5%, which appears more attractive than the U.S. equity market.
- China Factor: Potential upside from Chinese stimulus measures could provide significant tailwinds.
- Earnings Outlook: Most market experts believe that expected corporate earnings growth will improve in an interest rate easing environment with no recession, improving economic growth, and near full employment.
While there are challenges and uncertainties, the overall outlook for Australian equities in 2025 appears cautiously optimistic, with the potential for moderate returns and opportunities in specific sectors and undervalued stocks.
Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.
I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.
Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au
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