FY25 market wrap and outlook

Global wrap

Global shares finished the year with another strong result (+18.6%) but it wasn’t all smooth sailing with a major correction in the March/April period that saw the market down 18% before recovering into June. The first half of the year was all about ‘a soft landing’ as inflation continued to retreat and growth remained moderate. But the narrative began to change as Donald Trump won the November Presidential election, and the focus turned to tariffs and trade.

President Trump announced wide ranging tariffs on ‘Liberation Day’ April 2nd which sparked a meltdown in the markets. Trump subsequently delayed and diluted many of the tariffs, which allowed the market to recover. However, the US Federal Reserve (the Fed) remains wary of the impact of tariffs on inflation and has remained on hold at 4.25-4.50% since the start of the year.

Despite Trump’s tariff backflips, there still remains a relatively high level of tariffs (at around 15%) but remarkably the impact on prices has not yet shown up in the data. Trump is bullying the Fed for rate cuts, but the Fed (quite rightly) is waiting to see if the inflation data picks up in the second half of 2025.

At the same time, Trump has managed to get his “One Big Beautiful Bill” through Congress, which will extend income tax cuts and provide various company incentives but will also add US$3.4 trillion to the US public debt (currently US$36 trillion or 124% of GDP) over the next decade. The US has now lost all its AAA credit ratings and is down to AA+.

While the US market remains bullish on Trump’s pro-US policies, there remain some major risks around inflation and the trajectory of the US budget deficit and public debt. Already the USD has been weakening, and we have lingering concerns that US bond yields could rise with the pure volume of US bonds that need to be issued each year. Rising bond yields would be bad news for the US budget deficit and indeed most asset classes.

It is for this reason that we continue to tilt our portfolios towards Australian assets, where the levels of debt are much lower at the Federal government level (AAA credit rating), relative to the US and indeed Europe and Japan. We also believe that it is wise to start diversifying global exposure away from the US, towards other countries.

Australian wrap

Australian shares finished the year with a strong gain of 13.8%. The major events over the year were inflation retreating to target (2.0-3.0%) which has allowed the RBA to begin an interest rate easing cycle and the May Federal election, which saw a major swing to Labor away from the LNP and the Greens.

Both are positive for the markets in that monetary policy is easing and fiscal policy is likely to remain supportive due to elevated government spending and the proposed $17bn in income tax cuts to be implemented over FY26-FY27. Energy policy is also likely to remain stable, with nuclear power out of the question, although it seems Labor is now prepared to accept the role of gas as an important transition fuel.

The only real negative is the uncertainty surrounding global trade, particularly its impact on Asia, which is a major buyer of Australian commodities. So far, the impact has been mixed with some commodities (gold, copper, beef) notably stronger, while others (iron ore, coal, oil, lithium) have been weak. We should also mention that recent restrictions on student quotas (due to a shortage of accommodation) have reduced education exports.

Outlook

The outlook is mixed. We are generally positive on the outlook for Australia but remained concerned over the outlook for the US over tariffs and the expanding budget deficit. US interest rates could remain ‘higher for longer’ which does not seem to be priced into US markets. While the US technology theme is a clear positive, there are increasing risks around global trade issues upsetting supply chains and company earnings.

We prefer to tilt portfolios towards Australian assets and recommend clients begin to diversify global exposure away from the US. We retain our cautious stance, which mainly relates to US trade and fiscal policy.

Bill Keenan

Principal, Portfolio Manager

Bill Keenan is the founder of Sunbird Portfolios. Sunbird provides independent advice to leading financial advisers across Australia.

Bill has 30 years’ experience in financial markets and holds a Bachelor of Business in Accounting and a Graduate Diploma in Finance and Investment.

Warnings

General Product Advice - any advice provided in this document, is general in nature only and does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, the reader must consider whether it is personally appropriate considering his or her financial circumstances or should seek independent financial advice on its appropriateness.

Past performance is not a reliable indicator of future performance.