Welcome to 2025! As 2025 kicks off, several financial themes are poised to influence global markets and our investment strategies. We will dive deeper into these and provide ideas on where 2025 will take them. One theme that must be addressed is the potential subdued global economic growth. Recent data continues to show that the economy in China remains soft, and recent NBS and Caixin Manufacturing data reiterated the same, both showing continued softness. Both indexes remain above 50 but only marginally. The outlook is dim. Further, recent PMI data from Chicago US, also known as the “Business Barometer”, pointed to a continued slowdown in manufacturing. The Chicago PMI recorded the third consecutive loss in a row at 36.9. Note that the 10-year low is 32.9. A further worrying sign is the value of homes, which has always been a traditional store of value for consumers. Last week, the S+P Case Shiller Home Price MoM came in at -0.2% against a previous read of -0.3%, marking 3 months of continual decline. This week, we have a plethora of data in the US, including FOMC Minutes, which should provide a clue on how the Fed will manage this potentially softer patch of economic activity. Also, the US Non-farm payrolls are out at the end of the week. The number has been volatile lately, but the consensus is for a healthy 150k. In Australia, Core Logic’s Home Value Index MoM dropped into negative territory for the first time since July 2022 and has been on the slide since it peaked in May 2024. This is a worrying sign that the RBA continues to sidestep without relief on the interest rates’ insight. Given all this softer economic data, it’s incredible how the equity markets remain so high, so it’s essential to look at the current themes that will help shape our investment returns as we kick off the new year.
The biggest concern is a slowdown in global economic growth. China continues to reel from the effects of the collapse in the housing sector and weak manufacturing. European central banks have had to “man the pumps” and aggressively loosen monetary policy whilst data in the US remains mixed. However, as it is the lead economy, it is hoped that it will support the rest of the global economy. We anticipate a deceleration in economic expansion, with projections indicating a slowdown in GDP growth across all major economies. This trend suggests a shift from the robust post-pandemic recovery to more moderate growth rates. Note that we have been living off the effects of government COVID-19 spending (Government Spending below) for the last four years, especially in the US. With the deceleration, the persistent inflation worries are hoped to ease. Inflation rates are expected to remain above central bank targets, particularly for the Federal Reserve's 2% goal. This persistence may influence monetary policy decisions and impact consumer purchasing power, especially if it is combined with a weaker housing market and soft Industrial, manufacturing and retail sales data.
Government Spending (US (Blue), EURO(Grey), Japan (Red) and Australia (Black)
(Trading Economics)
The Federal Reserve may face challenges implementing consistent rate cuts due to ongoing inflationary pressures. This could lead to a cautious approach in monetary policy, affecting borrowing costs and investment decisions. Interest rates in the States are projected to remain range-bound, with the 10-year Treasury yield expected to fluctuate between 4% and 5%. This stability may encourage investors to focus on income-generation strategies within fixed-income markets. Well-rated corporate bonds should be increased in the portfolio. If in the US would look at Australian bonds as the currency is on its knees. Looking for stable income and a currency gain.
In equities, high company valuations in the US pose an issue. Elevated PE’s and valuations, particularly in the technology sector, raise concerns about market sustainability. While the U.S. tech sector's P/E ratios are higher than historical norms, they have not reached the extremes observed during past bubbles. The U.S. Information Technology sector's P/E ratio stands at approximately 31.9x. During the dot-com bubble of the late 1990s and early 2000s, tech stocks reached P/E ratios exceeding 100x before a market correction. Investors should remain vigilant, focusing on earnings performance, innovation trajectories, and broader market dynamics to assess the sustainability of current valuations. We continue to support a potential 15%–20% correction in equity markets, basically driven by economic policy uncertainties and high valuations. Investors are advised to maintain liquidity and adopt cautious investment strategies in growth areas.
An area of potential growth is Artificial Intelligence (AI) Integration. The expansion of AI across various industries is expected to drive revenue growth, particularly benefiting sectors such as technology and healthcare. Investors may focus on companies leading in AI adoption and innovation. Value stocks in AI, financials, energy, and consumer staples we feel will outperform growth stocks in sectors like healthcare, technology, and industrials. But keep an eye on the political environment.
The U.S. political landscape, with the return of Donald Trump to the presidency, introduces potential economic policy changes, including deregulation and tax reforms. These policies could have mixed economic growth and inflation implications, contributing to market volatility. This is a wild card as the Republicans control the Congress. This means that Trump can repeal and impose changes to policy. Understandably, he is pro-US business, so it will be interesting to see how changes will affect trading partners whose economies are the weakest. Ongoing geopolitical tensions and trade negotiations may impact global supply chains and economic stability. We need to remain focused on these policies as “what he says he can do”, as this may also affect the geopolitical arena.
The current geopolitical situation as we enter 2025 looks to have stayed. This is a concern as situations may flare up as players get restless. Currently, we are monitoring US-China trade tensions, particularly as we have China hawks in the White House. The situation in Gaza has been described as a "nonstop nightmare," with escalating air attacks across the Israel-Lebanon border bringing Lebanon to the brink. The conflict between Russia and Ukraine, initiated by Russia's invasion in February 2022, shows no signs of resolution. Further historical geopolitical theories highlight the strategic importance of Eurasia, with current rivalries involving alliances between China, Russia, North Korea, and Iran challenging U.S. hegemony, which, from a Trump administration point of view, will be tested. The geopolitical risk will affect commodity prices.
Oil prices remained relatively stable in 2024, but there is optimism for potential gains in 2025. Factors such as reduced production from key exporters and geopolitical developments in the Middle East could influence supply constraints, thereby supporting higher price. We have been bullish on the commodity for some time and see current levels as opportunities to buy( See chart below). Gold and Silver remain on the radar, and with CB buying geopolitical uncertainty and persistent inflation, we tend to like buying dips. Often seen as a barometer for global economic health, copper demand is expected to rise with the expansion of renewable energy projects and electric vehicle production. The possibility of the market moving to a deficit remains real. However, the softness in China will put the brakes on any increase. We expect some range trading opportunities. Adverse weather conditions in major producing regions, such as Russia, could impact wheat output, potentially leading to price increases. The weather, supply constraints, and increasing global demand have increased coffee and cocoa prices. We look for opportunities in these markets, considering factors like climate change and production levels in key growing regions. Monitoring climatic trends and crop reports will be essential for investors in this sector. We remain long.
The U.S. dollar's outlook for 2025 appears cautiously optimistic, with its strength underpinned by economic resilience and monetary policy.
As we kick off the year with most of the market back. It’s going to be fun week. There is plenty of data to help guide our strategies. Early on in the week, we have more Caixin data from China, with Services and Composite being released for both. Softer reads are expected. On Tuesday, we get a look at inflation in Germany, Italy and France; the YoY data is expected to increase marginally, ticking higher; however, the MoM for all regions is expected to see softer price pressures. On Wednesday, there are plenty of good ISM data and JOLTS Job openings. . Thursday sees the minutes from the last FOMC delivered, and in Australia, we get trade data. Then, on Friday, lots of Fed Governors are making speeches, and we get a look at employment data in the US. Non-farm Payrolls are expected to be at +150,000, a reasonable number that will give positive vibes.
This is a little tricky on the position … as we have positions remaining from last year. However, our analysis suggests that we steer the course. However, the AUD/USD is looking a little sad. We are still holding out with some “ice in the belly.” We remain in short equity positions (ASX 8000 and SP5428). Wheat, we stay long but are still happy to hold off doing anything for a longer period. Gold and silver traders, we also stay long and are happy to hold. The AUD/USD remains a concern which we monitor daily.
Trade Focus:
Crude Oil
Fundamentals:
As of early January 2025, crude oil prices have shown modest increases. West Texas Intermediate (WTI) crude is trading around $… per barrel, while Brent crude is approximately $… per barrel investing in crude oil at current levels presents opportunities. Supply constraints due to geopolitical tensions will support prices, while geological factors mentioned above could only help.
Technical Analysis:
WTI crude has recently surpassed a key resistance level at $…, which is now acting as … Immediate resistance is identified at $…, followed by $… and $…, which could serve as upside targets. On the 4-hour chart, prices are maintaining strength above the 50-day Exponential Moving Average (EMA) at $…, indicating sustained bullish momentum…
Support …
Resistance …
Momentum …
