Last month we published the HWP December Insight, reflecting on what shaped investment markets in 2024. This month we publish our outlook for 2025, the year ahead.
We believe 2025 will be “The year of Trump”. We anticipate geopolitics taking a leading role in shaping the investment landscape, specifically, whatever happens in the US will impact markets and economies globally.
Trump’s policies are marginally inflationary and suggest growth will be more skewed towards the US than Europe and Emerging Markets.
This time last year we included a chart from Bank of America highlighting how negative sentiment was and we suggested that too many investors were sitting back, comfortable with their 5 per cent yield from term deposits. This year we have included a chart from LSEG Datastream and Yardeni Research, which shows the opposite and that US consumers have never been more positive about stock market returns for the year ahead.
Sentiment is an important input when forecasting returns and at times it can work as a contrary indicator, as it did 12 months ago.
Capital Economics have titled 2025 as the year the global economy will “muddle through” and they expect “interest rates will fall further but (most) central banks will take their time” in getting rates to neutral levels.
We believe further interest rate cuts will support growth in 2025, but they will not act as the strong tailwind for markets as they did in 2024, instead taking a back seat role to ‘the year of Trump’. What happens in America, i.e., what Trump says and does, will impact the rest of the world.
We believe US exceptionalism will continue in 2025, supported by Trumps’s “America First” policies, in particular those supporting corporate activity such as deregulation and tax cuts. Trump’s tariff rhetoric, should it be implimented in full, raises our stagflation risk scenario and would lead to higher inflation and slower growth. Other risks to our positive outlook for 2025 are those from Trump’s immigration policies, which could lead to tigher labour markets and wage inflation, thereby limiting the extent and depth of future rate cuts.
Immigration curbs are also a risk to global Developed Markets outside of the US, with the hit to labour supply being inflationary and dampening GDP growth. Capital Economics have detailed a sharp rise in the vote share going to anti-immigration parties amongst Developed Market economies, and we view this as a key downside risk to growth, with Capital Economics projecting a 0.5% decrease in Australian GDP if immigration is cut to pre-pandemic levels.
We flagged AI or Artificial Intelligence as a strong theme in 2023 following the launch of Chat GPT, and equity markets recorded exceptional gains in the technology and communication sectors in 2024, supported by this AI theme. We anticipate further equity market strength in 2025, again focused on the US technology and communications sectors, but we note a shift in market leaders recently from hardware companies within the semiconductor ‘chip’ sector towards more software-based AI businesses.
We close out 2024 with our marginal tactical overweight position in risk-based assets, through Developed Market Equities, Diversified Credit and Infrastructure.
We are reluctant to provide guidance on where we expect our Tactical Asset Allocation will shift in 2025, as we did this time last year, given the uncertainty of Trump’s policy rhetoric. We do however anticipate these shifts continuing to help balance risk in portfolios, and we stress the importance of diversification both across and within asset classes. Our positioning as we enter 2025 is as follows.
Fixed Income
We removed our long duration position in early 2024 as it became clear that recessionary risk had reduced and our base case soft landing scenario was more likely. This meant the risk/reward payoff for holding duration was no longer attractive enough and favoured cash plus holdings. We continue to hold zero or very short duration defensive assets and anticipate maintaining this view through 2025.
Capital Economics expect continued moderate loosening in Developed Market labour markets to more balanced levels over 2025, with services inflation to follow suit. Risks of a fiscal misstep could see Treasury yields rise above current levels in 2025, however we expect policy makers in the US to reject any large fiscal expansion proposed by Trump, as bond markets would ultimately restrict their ability to spend more.
Investment Grade (IG) Credit spreads are at multi-decade lows, reflecting the strength of the US economy. These tight spreads have come despite very high IG issurance. US Exceptionalism and the expectation for higher corporate profits from Trump’s policies looks set to support corporate bonds through 2025.
Whilst we remain underweight Fixed Income markets and hold little duration, we do anticipate further rate cuts globally in 2025. The US Fed cut rates by 100bpt in 2024 and sent volatility higher in December with commentary that forecasts 50bpt of cuts in 2025, compared with prior forecasts for 100bpt of cuts. Chairman Powell described their future interest rate path as “not unlike driving on a foggy night or walking into a dark room full of furniture: if you’re not sure, you just slow down”. We expect the RBA to cautiously commence their rate cutting cycle in Q2 2025 and follow a similar data dependent approach as the US.
Currency
We are never comfortable forecasting a level for the Australian Dollar (AUD) as no one ever calls it correctly, but we are always prepared to give it a direction.
The market has interpreted Trump’s policies as marginally inflationary and therefore resulting in less rate cuts than expected before the election result. This means interest rate differentials will be less supportive of the AUD over 2025.
Chinese stimulus measures are hard to predict but play a key role in determining where the AUD will head. A step up in Chinese stimulus that targets their consumer will lift sentiment and provide a boost to the AUD in the short term.
We expect counteracting forces to lift currency volatility in 2025 and for the AUD to be higher at the end of 2025 from current levels. We note the NAB forecast for 2025 states that they “wouldn’t be surprised to see the AUD/USD trade with a ‘5’ in front of it at some point next year” before drifting higher over the medium term.
Equities
We enter the year Overweight Developed Market Equities with an Overweight in mid caps, Neutral US large caps and a Neutral weighting towards Australian and Emerging Market Equities.
Our year of the Trump theme is most evident in our equity market positioning as discussed at the beginning of this Insight. US Exceptionalism, or as some are putting it, ‘rest of world mediocracy’, is driving our Overweight mid cap position, noting the majority of this holding is US based. Mid Caps are relatively cheap compared to large cap equities and these businesses are well positioned to benefit from Trump’s America First approach.
In Emerging Market Equities (“EM”) we enter the year with a Neutral stance to strategic benchmarks and we maintain our longterm strategic underweight to China. China has a terrible trifecta in terms of poor demographics, a weak property sector and a macro/political landscape that is often unfreindly to outside capital. Short term stimulus will likely see cyclical outperformance in the short term, however we maintain our longer term structural underweight to China.
Domestic equities are likely to grind higher during 2025 and be dragged along by gains from offshore equities, however the structure of our market, being overweight commodities, materials and financials, means we wont benefit to the same degree as markets like the US, which has over 40% of its index in AI related sectors such as technology and communication.
Property
Picking a bottom in the commercial property downturn can be a risky bet and we are pleased that we did not participate in any new commercial property deals during 2024. We expect demand and supply forces to eventually balance the commercial property market over the coming years, with very little new supply scheduled to come to market over 2025/26 due to the high cost of capital and construction challenges. On a positive note, transactions have started to increase from very low levels and capital is entering the market, noting we observed two $100mln plus A Grade commercial deals receive approximately 10 offers each towards the end of 2024.
Overall we have a Neutral stance towards property and will continue to assess unlisted deals as they come to market over 2025.
Alternative Assets
We see these asset classes as crucial to both portfolio returns and risk management.
This time last year we stressed the importance of liquidity and we are again warning against over exposing portfolios to less liquid investments. Liquidity provides flexibility and optionality. It allows you to adjust portfolios quickly to meet changing market conditions and regimes.
Our year of Trump theme for 2025 reinforces this point, as his policy rhetoric to date has shifted market sentiment and we expect this to continue into 2025.
We have completed work on several new evergreen global Infrastructure funds in recent months and we believe these are well placed to outperform more traditional domestic infrastructure options due to their superior geographic diversification and value add approach. These newer vehicles contain monthly liquidity, which helps with portfolio planning but should not be relied upon in times of stress, as the liquidity is capped and likely wont be available when volatility spikes.
Trump and the Republican party are viewed as business friendly and this has flowed through to a lift in buisness confidence. We have already seen green shoots in the IPO markets, with corporate activity lifting in late 2024. We expect this sentiment to continue in 2025 and provide liquidity for Private Equity strategies to realise value in their portfolios.
Finally
As a firm we visited major economic regions in the US, Europe, and the UK over 2024, which we believe has helped gain boots-on-the-ground insights into sentiment within these regions and we cannot stress enough how important it is to look abroad when forming views, considering the challenges we face in Australia. In early 2025 we will again visit the UK and Europe to not only gain insights from business leaders but also to complete research efforts on several private equity strategies that are based in these regions.
In 2024 we conducted our eighth consecutive Net Promotor Score or NPS Survey of our clients.
Thank you for your feedback. We received the second highest rating of 83 from you, our clients, with a median score of 9.5/10. Your feedback is crucial as we seek to continuously improve our client experience. This is the fundamental principle and purpose of the “HWP Way.”
During 2024 as a firm, we spent time concentrating on a book titled Unreasonable Hospitality: The remarkable power of Giving People more than they expect, by Will Guidara. What it has taught us is how to concentrate from the ordinary to the extraordinary experiences for you, our clients. We cannot recommend this book highly enough as some holiday reading.
As Managing Director, one thing I have realised from visiting other great wealth firms globally, is that in Australia we have all these awards for client experience, but they are all relative. In 2024 at HWP we have not concentrated on benchmarks. We believe when it comes to client experience, we have been a leader for a decade, and therefore we must not aspire to meet a benchmark but rather to set one.
We live in an environment where safety and instability are part of the external environment, and as a leader in this area we aspire to set for our clients a friendly, accessible and values led culture necessitating hiring the best wealth managers in their areas of expertise. We know our clients are demanding, as they should be, and they are unwilling to settle for an inferior experience.
As wealth managers we always concentrate on fundamentals, but investing also requires optimism.
We must be careful to ensure our views do not become biased or anchored to the most recent market environments. Volatility is the lifeblood of markets and successful investors never forget that managing this volatility is a critical component of investment strategy.
We wish you and your families all the best in the New Year, and we look forward to a successful 2025.
Login to …