Another Year of Strong Investment Returns – But Is It Sustainable?
The past year saw investment markets once again climb a wall of worry, delivering strong returns for diversified investors. Yet, the sustainability of these gains remains in question.
The Key Market Drivers...
Resilient Economic Growth: Despite recession fears flaring up in August and again in April due to Trump’s tariff announcements, economic growth has consistently outperformed expectations—albeit remaining modest.
Ongoing China Concerns: While China’s property sector remains under pressure and tariffs have reignited anxiety, the economy continues to grow around 5%, supported by measured policy stimulus.
Trump’s Global Trade Disruptions: Initially boosting markets, Trump’s erratic policy moves—including tariffs, attacks on institutions, and shifting alliances—have created volatility. Markets bottomed after his “Liberation Day” tariffs in April, then rallied as he paused further actions for trade negotiations.
Sharp Fall in the US Dollar: The US dollar experienced its worst start to a year since Nixon, due to concerns over US growth, public debt, and foreign policy uncertainty—prompting central banks to diversify away from US assets.
Geopolitical Tensions: The brief flare-up involving Iran, Israel, and the US caused temporary concerns for oil supply but quickly faded as prices fell.
Global Disinflation: Inflation has continued to ease globally, including in the US and Australia, supporting market sentiment.
Rate Cuts by Central Banks: Most major central banks have cut rates to support growth, including the RBA, which moved twice with dovish signals. The Fed has held steady but remains accommodative.
AI-Driven Optimism: AI enthusiasm continues to propel tech stocks, especially in the US, amid optimism about productivity gains.
2024–25: Another Financial Year of Strong Returns...
Global shares rose 13.8% in local terms and 18.6% in AUD terms, boosted by a weaker Australian dollar. US, Chinese, and Eurozone markets led the way.
Australian shares also gained 13.8%, driven by rate cuts and strength in IT, financials, and telcos—though resource stocks lagged.
Property and bond markets performed well: REITs returned up to 14%, and bonds benefited from falling yields.
Superannuation funds delivered an estimated 10.2% return, marking the third consecutive year of strong gains.
Investment Lessons from 2024–25:
Bear markets are unlikely without recession.
Falling inflation and interest rates are tailwinds for equities.
Trump is constrained by market reactions and political realities.
Middle East conflicts may stir short-term volatility but typically don’t have lasting economic impacts unless oil is disrupted.
Market timing remains incredibly difficult—sharp April declines gave way to fresh highs by June.
Looking Ahead: Volatility and Moderated Returns...
Markets face several headwinds in the year ahead:
Trump’s Tariffs: With the July 9 pause nearing its end and more tariffs looming, trade uncertainty could return. Deals like the 20% Vietnam tariff raise concerns.
US Fiscal Worries: The budget deficit remains stubbornly high, risking more pressure on the US dollar and bond yields—especially if Trump challenges Fed independence.
Geopolitical Risks: Tensions with Iran, the US-China dynamic, and the Ukraine conflict remain unresolved.
Tech Dependence: US equity strength has hinged on a few large-cap tech names like Nvidia, posing a concentration risk.
Overvaluation: Valuations, particularly in the US, remain elevated. Eurozone shares look more reasonably priced but haven't yet narrowed the gap.
While another 15% correction is possible (particularly in the traditionally weak August–September window), I expect the RBA to cut rates four times out to February next year taking the cash rate to 2.85%. All of which should help support economic and profit growth and drive a rising trend in shares. And if Trump adopts more market-friendly stances ahead of elections and rate cuts resume, equities may resume an upward trend into 2026.
Final Thoughts: Stick to Long-Term Principles...
Investors should stay grounded:
Volatility is normal and to be expected.
Avoid emotional selling—locking in losses rarely pays.
Falling asset prices mean better long-term value.
Australian shares still offer strong dividend yields.
Markets often bottom when pessimism peaks.
In uncertain times, it’s best to turn down the noise and maintain a disciplined, long-term investment strategy.
Rick Maggi, Financial Advisor Perth, Westmount Financial
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Disclaimer
This article has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.