Feb & March 2025 Market Review and Strategic Insights for Investors Overview.

Our latest market review outlines significant developments across different asset classes, providing a comprehensive analysis and strategic insights from an investor's viewpoint.

US Tariffs on Steel and Aluminium

The recent imposition of a 25% tariff on steel and aluminium imports by the US, targeting major trading partners like China, Canada, and Mexico, marks a significant shift in trade policy. This move is part of a broader strategy to protect domestic industries and address perceived unfair trade practices. The tariffs are expected to have several implications:

• Inflationary Pressures: The tariffs could lead to higher input costs for US manufacturers, potentially driving up prices for consumers and contributing to inflation.

• Global Trade Tensions: Reciprocal tariffs from affected countries could escalate trade tensions, impacting global supply chains and economic growth.

• Investment Opportunities: Investors should monitor sectors directly affected by these tariffs, such as manufacturing and construction, for potential volatility and opportunities.

Reserve Bank of Australia (RBA) Rate Cut

The RBA's decision to cut the cash rate by 25 basis points to 4.10% is a pivotal development. This is the first rate cut since 2020 and reflects the central bank's response to easing inflationary pressures and a relatively tight labor market. Key considerations include:

• Economic Stimulus: The rate cut aims to stimulate economic activity by reducing borrowing costs for businesses and consumers.

• Labor Market Dynamics: Despite the rate cut, the RBA remains cautious about further easing due to tight labor market conditions and stagnant productivity growth.

• Investment Strategy: Investors may consider increasing exposure to interest rate-sensitive sectors, such as real estate and utilities, which could benefit from lower borrowing costs.

Australian Employment Data

January's employment data showed a solid addition of 44,000 jobs, with the unemployment rate slightly rising to 4.1%. This indicates a resilient labor market, albeit with some signs of softening:

• Wage Growth: Wage growth has weakened, slowing to 3.2% year-on-year in Q4 2024, which may impact consumer spending and overall economic growth.

• Sectoral Performance: Employment gains were broad-based, but sectors like healthcare and education showed particularly strong growth.

• Investment Implications: A stable labor market supports consumer confidence and spending, which is positive for retail and consumer discretionary sectors.

US Q4 2024 Corporate Profit Season

The US corporate profit season for Q4 2024 has been robust, with 75% of S&P 500 companies reporting positive earnings surprises. This reflects strong corporate performance despite macroeconomic challenges:

• Earnings Growth: Key sectors such as technology and healthcare have driven earnings growth, supported by innovation and strong demand.

• Market Sentiment: Positive earnings surprises have bolstered investor confidence, contributing to market resilience.

• Strategic Focus: Investors should continue to focus on high-quality companies with strong earnings growth potential and robust balance sheets.

Investment Preferences

Given the current market environment, we favor certain asset classes and regions:

• International Listed Property: Fundamentals in international listed property remain healthy, with attractive valuations providing opportunities for growth.

• Japanese Shares: Japan's economic rebound and solid earnings growth make Japanese equities particularly appealing. Structural reforms and corporate governance improvements are additional catalysts for growth.

• Australian Sovereign Bonds: Domestically, we prefer Australian sovereign bonds over cash, as interest rates are likely to have peaked this cycle. These bonds offer a stable income stream and are less susceptible to market volatility.

Australian Shares

• Performance: Australian shares underperformed their global counterparts, declining by 3.8% in February.

• Sector Analysis:

  • Banking Sector: Disappointing earnings results, particularly from the banking sector, were a significant drag on performance. Banks reported pressure on their net interest margins, reflecting the challenging economic environment.

  • Utilities Sector: The best-performing sector, rising 2.7%, likely benefited from lower international bond yields due to their sensitivity to borrowing costs.

  • Consumer Staples: This sector followed closely, up 1.5% over the month, indicating resilience in essential goods and services.

  • Information Technology: The worst performer, dropping 12.3%, driven by a significant decline in WiseTech Global Ltd, which fell 27.7%.

Strategic Insights for Investors:

• Diversification: Given the underperformance of Australian shares, investors should consider diversifying their portfolios across different sectors and regions to mitigate risks.

• Sector Rotation: Focus on sectors with strong fundamentals and growth potential, such as utilities and consumer staples, which have shown resilience.

• Monitoring Earnings: Keep a close watch on earnings reports, particularly in the banking sector, to assess the impact of economic conditions on profitability.

International Shares

• Performance: International shares (hedged) had a marginally negative return of -0.9% in February, impacted by disappointing US economic data, rising inflation, and investor sentiment around President Trump's economic plans. Unhedged international shares fell by 0.4%, with the AUD declining over the month.

• Small-Cap and Emerging Markets:

  • Small-Cap Shares: Underperformed the broader indices, declining by 3.0%.

  • Emerging Market Shares: Up 0.8%, driven by value found in Chinese tech stocks following Deep Seek’s AI research announcement.

• Sector Performance:

  • Consumer Staples: The best-performing sector, up 5.2%, reflecting strong demand for essential goods.

  • Consumer Discretionary: The worst performer, down 6.4%, indicating reduced consumer spending on non-essential items.

Strategic Insights for Investors:

• Global Exposure: Maintain exposure to international shares to benefit from growth opportunities outside Australia.

• Emerging Markets: Consider increasing allocation to emerging markets, particularly in sectors like technology, which are showing strong growth potential.

• Sector Selection: Focus on sectors with robust demand, such as consumer staples, while being cautious with consumer discretionary sectors.

Fixed Interest

• Performance:

  
  

  • International Sovereign Bonds: Up 1.0% in February, driven by falling bond yields due to softer-than-expected US economic data.

  • Australian Sovereign Bonds: Up 0.9%, with RBA comments likely keeping bond yields elevated compared to international yields.

  • International Credit: Up 1.4%, with unchanged credit spreads and positive returns from falling absolute yields.

Strategic Insights for Investors:

• Bond Allocation: Increase exposure to sovereign bonds, both international and Australian, to benefit from stable income and lower volatility.

• Credit Markets: Consider high-quality international credit for potential yield enhancement, while being mindful of credit spreads and economic conditions.

Real Assets

• Performance:

  • International Listed Property and Infrastructure: Performed well, benefiting from falling international sovereign bond yields.

  • Australian Listed Property: Fell over the month due to capital raising in the sector.

Strategic Insights for Investors:

• Real Assets: Maintain or increase exposure to international listed property and infrastructure, which offer attractive valuations and income potential.

• Australian Property: Be cautious with Australian listed property due to potential capital raising and market volatility.

Currency

• Performance: The AUD/USD was mostly unchanged in February, but the AUD fell against other major currencies. This reflects a positive month for most major currencies versus the USD, with the AUD not benefiting from this trend.

Strategic Insights for Investors:

• Currency Hedging: Consider currency hedging strategies to protect against volatility in the AUD and other major currencies.

• Global Diversification: Diversify investments across different currencies to mitigate currency risk and benefit from global economic trends.

March 2025 Market Sell-Off: Analysis and Insights

The market sell-off in March 2025 has raised concerns among investors. Several factors have contributed to this downturn:

1. Economic Uncertainty: Fresh concerns about tariffs and economic slowdown have weighed heavily on investor sentiment[1]. The on-again, off-again nature of trade policies, particularly those involving the US and its trading partners, has created an environment of uncertainty.

2. Inflation Fears: Rising inflation, driven by higher input costs due to tariffs, has led to fears of tighter monetary policies[2]. Central banks may respond with interest rate hikes to curb inflation, which can negatively impact equity markets.

3. Corporate Earnings: Disappointing earnings results from key sectors, including technology and consumer discretionary, have further dampened market sentiment[1]. Companies facing higher costs and supply chain disruptions are struggling to maintain profitability.

4. Geopolitical Tensions: Ongoing geopolitical issues, including trade disputes and regional conflicts, have added to market volatility[1]. Investors are cautious about the potential impact of these tensions on global economic growth.

Strategic Insights for Investors:

• Long-Term Perspective: While market sell-offs can be unsettling, it's important to maintain a long-term perspective. Historically, markets have rebounded from downturns, and periods of volatility can present buying opportunities for high-quality assets.

• Diversification: Ensure portfolios are well-diversified across asset classes, sectors, and regions to mitigate risks associated with market volatility.

• Quality Focus: Focus on high-quality companies with strong balance sheets and robust earnings growth potential. These companies are better positioned to weather economic uncertainties.

• Risk Management: Implement risk management strategies, such as hedging and asset allocation adjustments, to protect portfolios from downside risks.

Conclusion

The current market environment presents a mix of challenges and opportunities. We are staying informed and strategically positioning your portfolios, so that we can take advantage of any opportunities that present themselves now and in the future.