2024 In Review & 2025 Outlook

Alphinity Investment Management 

January 2025

If 2024 was the year of Elections, Economics, Evolutions and Earnings, what is in store for Australian equities in 2025?

The year 2024 proved to be a remarkable one, both in absolute terms and relative to expectations. As the year unfolded, it brought numerous surprises and developments that shaped the global economic and political landscape. From election outcomes (and associated geopolitics), diverging economic growth (and interest rate changes), to the AI evolution (and associated ripple effects) and finally the return of earnings revisions as a key relative individual stock performance driver.

Elections, economics, evolutions and earnings - a fitting summary of some of the primary forces behind the global equity rally as 2024 draws to a close.

Below we explore these themes in more detail, share our outlook for 2025 and how the Alphinity Australian Funds are positioned going into the New Year.

2024 in review:

As we entered 2024 a year ago, there were widespread expectations of significant rate cuts in the United States. However, as the year progressed, only a handful materialised, accompanied by a soft landing for the economy. In Australia, the Reserve Bank maintained a resolute stance against rate cuts, though some cracks in this position began to appear towards the year's end.

The U.S. presidential election was a focal point of 2024, filled with twists and turns. The outcome, with Donald Trump's victory, is likely to usher in policies and a political and regulatory environment perceived as pro-business and pro-market. Meanwhile, China's

attempts at economic stimulus, while showing some much-needed strong intent, fell short of expectations in the detail, failing to provide the anticipated boost to global growth just yet.

In the financial markets, the U.S. stock indices continued their upward trajectory, propelled by the "Magnificent Seven" tech giants and artificial intelligence advancements. This momentum had a positive spillover effect on the Australian market, with the technology sector the highest contributor to returns despite the pullback in December (+49% YTD). Outside of the tech sector, the strong performance in the US had a broader positive impact in the Australian market through the year, despite quite different economic and earnings outcomes.

For Australian investors, the strength of major banks, particularly Commonwealth Bank and Westpac, was also noteworthy, driven by small but persistent earnings upgrades. With earnings upgrades few and far between elsewhere (the market in total having net downgrades), financials continued to be well supported, almost regardless of valuations.

From a portfolio and process perspective, it was encouraging to see the re-emergence of earnings revisions as a key individual stock driver and alpha generator over the last 12 months, something that went temporarily missing for much of 2022 and 2023 as large top down thematics and swings took precedence. This trend allowed for consistent momentum to be a key driver, which assisted all the Alphinity funds to capture positive alpha for our clients this year.

The outlook for 2025:

Looking ahead to 2025, the outlook appears more nuanced. A repeat of the robust absolute returns seen in 2024 seems less likely, given the high valuations and elevated expectations that now form a more challenging starting point. Unlike 12 months ago, everyone appears positioned for a "no-landing" or at worst a "soft-landing" already, with very little wall-of-worry to climb. However, a precipitous decline is not anticipated either. Several positive factors remain that could continue to drive the market forward.

The U.S. economy continues to show resilience, and the new Trump administration is expected to implement pro-business, growth-oriented policies and a market friendly environment, at least initially. There's potential for more rate cuts in international markets (even though less than hoped for initially) including, but perhaps toto a lesser extent, in Australia. China, while still facing challenges, has demonstrated strong intent and retains some levers to stabilise its economy, potentially becoming less of a drag on global growth and sentiment. We have our own election here in Australia that is likely to lead to more fiscal stimulus promises from the major parties, and a focus on 'cost-of-living' pressures.

Nevertheless, earnings expectations in the U.S. are already quite high, (less so here in Australia), making further PE expansion as the main market driver less likely unless we have a material change in interest rate view. The focus will need to shift to actual earnings outcomes. Uncertainties surrounding U.S. trade policies, inflation trajectories, interest rate movements, and geopolitical tensions add complexity to the outlook.

While material growth in market indices may be harder to achieve in 2025, there is enough positive momentum to sustain current levels for some time. A period of market consolidation wouldn't be surprising however after the strong run in 2024, though a more significant correction would likely require catalysts beyond just high valuations (such as an economic, earnings or interest rate policy surprise).

It is likely that rather than the level of the market, the key question for 2025 will revolve around potential sector and stock rotation. Will the current market leaders maintain their dominance, or will we see new market leadership emerge? For example, changes in monetary policy, such as rate cuts in Australia, could benefit domestic and consumer cyclical stocks. A recovery in China or more forceful policy might boost commodities, as would improved US and global economic growth. In a flatter or weaker market environment, defensive stocks might get their time in the sun yet again. Ultimately, whatever the market environment it is likely to be earnings driven. Market leadership will be driven by those companies that can produce better earnings outcomes than expected, which is what we saw eventuate in 2024. The key will be the flexibility to move to where earnings leadership is as the year unfolds.

How are we positioned?

Given these considerations, a relatively balanced portfolio approach seems prudent to start 2025, focusing on likely earnings outcomes in individual stocks rather than trying to second guess broader macro drivers. Some increased defensive positioning is likely advisable due to high market valuations, but maintaining some exposure to domestic interest rate-sensitive sectors could be beneficial for example if rates decrease.

Our portfolios continue to be positioned in stocks with better earnings outlooks than the market expects, as per our investment process. While we do focus on earnings momentum and the quality of those earnings primarily, we also care about valuation. Valuation rarely tells you when a stock or market is going to turn, but it does tell you when risk is increasing. As such, without a better earnings outlook for the market overall, risks in the market have by definition increased alongside those higher valuations. So, the portfolio needs to be very vigilant around investing in stocks that are showing earnings leadership and delivering earnings upgrades.

As the year unfolds and new earnings trends become clearer, we will continue to adjust our portfolios to align with new earnings leaders.

Funds operated by this manager:

Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Global Sustainable Equity Fund, Alphinity Sustainable Share Fund

10k Words

Equitable Investors

January 2025

Funds operated by this manager:

Equitable Investors Dragonfly Fund

Disclaimer

Past performance is not a reliable indicator of future performance. Fund returns are quoted net of all fees, expenses and accrued performance fees. Delivery of this report to a recipient should not be relied on as a representation that there has been no change since the preparation date in the affairs or financial condition of the Fund or the Trustee; or that the information contained in this report remains accurate or complete at any time after the preparation date. Equitable Investors Pty Ltd (EI) does not guarantee or make any representation or warranty as to the accuracy or completeness of the information in this report. To the extent permitted by law, EI disclaims all liability that may otherwise arise due to any information in this report being inaccurate or information being omitted. This report does not take into account the particular investment objectives, financial situation and needs of potential investors. Before making a decision to invest in the Fund the recipient should obtain professional advice. This report does not purport to contain all the information that the recipient may require to evaluate a possible investment in the Fund. The recipient should conduct their own independent analysis of the Fund and refer to the current Information Memorandum, which is available from EI.

The door for rate cuts opens further

Pendal

December 2024

THE Australian economy grew by only 0.3% in the September quarter, once again falling behind population growth.

We managed only 0.8% growth for the year, yet the RBA still thinks demand outstrips supply.

The September quarter GDP numbers were always going to be more interesting than most.

Tax cuts and government subsidies were hitting consumer pockets and the big question was whether they would be spent or saved. For now, it appears consumers have been happy to pocket the extra money.

Spending by business and consumers once again flatlined and per capita consumption fell by 2% over the year.

The only growth we could find was, once again, the government - which now comprises almost 28% of GDP, up from around 23% for most of the past 50 years.

The graph below, courtesy of Westpac, highlights this extraordinary return of big government.

Source: Westpac Economics

Source: Wages grow 3.5 per cent for the year | Australian Bureau of Statistics

The national accounts also provided more information around wage pressures. As the high wage outcomes of 2022 and 2023 have faded from view, these are easing quickly.

Average earnings per hour moderated to 3.2%yr, from 6.5%yr in the June quarter. This is consistent with recent wage data at 3.5%.

We have weak growth, moderating inflation, wages under control and global easing cycles - so why the hesitation from the RBA?

The central bank remains focused on the idea that the labour market remains too tight, as it believes that 4.5% - not the current 4.1% - to be full employment.

The data is now suggesting otherwise.

Outlook

It will be an interesting few upcoming meetings for the RBA board.

February will likely be the last monetary policy board decision for three of the six independent directors. And March or April will see a split into governance and monetary policy boards.

Whether this influences thinking remains to be seen, but the current spirit of caution may yet stop a rate cut in February.

However, I think the RBA may do a short sharp pivot in the next few months, and view two cuts (in February and May) as still on the cards.

The Q4 inflation data at the end of February will be another low number, with even underlying inflation likely to print 0.6%, or annualised at the RBA midpoint.

While bond investors will be cheering for a cut, the Labour government will be desperate for one ahead of the "cost-of-living" election.

Time will tell if the RBA delivers for them.

Author: Tim Hext

Funds operated by this manager:

 This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

Understanding Bridging Loans: A Comprehensive Guide

Australian Secure Capital Fund

December 2024

Funds operated by this manager:

ASCF High Yield Fund, ASCF Premium Capital Fund, ASCF Select Income Fund

The content on this page is intended solely for general informational and educational purposes and should not be interpreted as financial advice. Although we make every effort to ensure the accuracy and relevance of the information, it may not always reflect the latest legal or financial changes. We strongly recommend seeking guidance from a qualified financial advisor or professional before making any financial decisions. Use the information at your own discretion.

Hedge Clippings | 20 December 2024

As we in Australia end the year as it started - with the RBA's cash rate stuck at 4.35% - in the US the FOMC cut rates 0.25% to 4.25 to 4.50%, leaving markets unimpressed - not so much because they were hoping for more, but because Jerome Powell flagged a slow down in the rate of cuts in 2025.

As a result equity markets took the hint - not really surprising given the recent "Trump Effect" rally, and leading into the Christmas break, year end, and question marks over the effect of next year's policy changes on tariffs, deportations and foreign policy. Markets simply don't like uncertainty, and no one is quite sure of their outcome on inflation and trade.

Back in Australia, and looking forward to 2025, speculation - or expectation - is increasing that the RBA will finally start the easing process, possibly as early as the next Board meeting scheduled for 17/18th of February. Jim Chalmers will be hoping for that - or at least that it occurs before the upcoming election. Policy wise the PM and Treasurer are doing everything they can to shore up votes by softening the cost of living crisis and thereby claim credit for easing the burden on consumers' pockets, as well as take the credit for a rate cut - if it eventuates. Meanwhile, Chalmers is also claiming credit for keeping the economy out of a recession thanks to the government's increased hiring and spending, while at the same time their spending is one of the main drivers of the inflation which has been keeping rates higher for longer.

Chalmers' hopes will be bolstered by the changes both to the structure and composition of the RBA board which are due to take effect on March 1st, but depending on when the election is held, it's going to be a close run thing.

The first meeting under the new board doesn't take place until March 31st, with the result announced on April Fools' day - although the tricks are supposed to finish by midday. Meanwhile the election has to be held by May 17th, just two days before the following RBA meeting.

So a rate cut in February may be on the cards. The outgoing Board will want to show it was their decision, and not one forced on them by the new appointees as soon as their bums hit their seats. And the incoming board won't want to imply criticism of the old one by moving at the first opportunity.

So 2025 is shaping up to be interesting times both in the US and locally, particularly given the current closeness of the polls. Post the election one of the worst outcomes is likely to be a hung parliament, with the potential for a "coalition" between Labor and the Greens/Independents.

Interesting times indeed!

In the meantime, Hedge Clippings will be taking a break for a few weeks over Christmas and New Year to re-charge the batteries. We'd like to take the opportunity of wishing all our readers a safe holiday, and a healthy, prosperous and happy New Year.

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