Equity Strategy
22 January 2025
Key Themes to Watch in 2025
Macro and Geopolitical Crosscurrents to Drive the ASX in 2025
 

The 2025 calendar year is set to feature a number of macroeconomic and geopolitical crosscurrents that will drive the local equity market over the course of the next twelve months. 

This report explores the key risk factors / themes in 2025, which include: 

  1. The path of interest rates
    our base case is for the RBA and the Fed to cut rates in 2025. The Focus Portfolio is selectively exposed to ‘rate cut beneficiaries’ where the risk/reward is most compelling. 
  2. Australian federal election – 
    outside of potential stock-specific impacts, the direction of the ASX 200 is likely to be largely agnostic to the outcome of the election. 
  3. Trump 2.0
    Australia’s economy is relatively sheltered from the threat of US tariffs, yet segments of the ASX offer favourable linkages to the US economy (and hence Trump’s pro-growth agenda). The Focus Portfolio has meaningful exposure to companies with US operations. 
  4. China stimulus
    the extent of China’s stimulus efforts will be the major swing factor for the resources sector in 2025. The portfolio’s key commodity exposures are towards copper and aluminium where the supply/demand outlook is most compelling, irrespective of China’s ultimate stimulus response.
  5. IPO market activity
    after a multi-year IPO drought, we expect the listings environment to improve in 2025, following renewed activity in the IPO market in late 2024. 

Overall, the Focus Portfolio is well positioned in light of our macro views, albeit we expect the portfolio to be resilient in various macro scenarios given its focus on high quality businesses with durable competitive advantages and bottom-up secular growth drivers.

Figure 1: The Focus Portfolio is overweight the higher-growth consumer services, tech, and healthcare sectors; and maintains an underweight exposure to the banks and iron ore miners
 

1. Interest Rates – Cuts Expected in 2025

The path of interest rate expectations (and long bond yields) will be a key swing factor for the local market in 2025, particularly for the more interest rate sensitive corners of the market.

We expect the RBA to cut rates multiple times this year starting in May, which will be supportive of domestically focussed businesses in the more cyclical retail, consumer services, and industrial sectors. However, the Focus Portfolio maintains only relatively selective positioning within these sectors, given generally demanding valuations suggest investors have already ‘priced in’ rate cuts for many of the ASX’s rate cut beneficiaries (most notably in the retail sector). 

RBA rate cuts should also be broadly supportive of small caps, where valuations are attractive after two years of underperformance following successive rate hikes in 2022-23. Accordingly, the Focus Portfolio is overweight small caps.

Collins Foods (Focus Portfolio holding) will be a meaningful RBA rate-cut beneficiary, in our view, given improved consumer confidence will be key for the trajectory of its same-store sales growth and its margin recovery (which will be reliant on menu price increases). 

In the US, market pricing suggests the Fed will also cut rates further in 2025, which should be supportive of rate-sensitive companies exposed to the US consumer and housing market, including Breville (Focus Portfolio holding) and James Hardie (Focus Portfolio holding). 

However, we are cognisant that Trump's stimulatory policy platform (with large budget deficits expected to continue) presents tail risks for US long bond yields (and hence mortgage rates), which could eventually threaten the market’s ‘risk-on’ mindset – particularly within interest-rate sensitive sectors. 

Figure 2: The RBA and the Fed are expected to cut interest rates in 2025
Figure 3: ASX small caps have underperformed since the RBA hiked rates in 2022
Figure 4: ASX small cap valuations are attractive relative to history
 

2. Australian Election – Largely Inconsequential for the ASX 200

With the next Australian Federal Election due by May 2025, recent polling and betting market odds indicate we are set for a tight contest between Labor and the Coalition, with the latter currently the favourite to form government. Given the tightness of the polls, the most likely outcome is for the formation of a minority government, rather than an outright victory. 

Notwithstanding the lack of policy detail from either party at this stage, the direction of the ASX 200 should be largely agnostic to the outcome of the Federal Election. While the Coalition has traditionally adopted a more business (and therefore market) friendly platform, there is no clear evidence at the index level of any preference towards one party over the other. 

Historically, the greatest driver of ASX 200 index returns has arguably been the global equity market cycle, rather than the incumbent government’s policies of the time. However, the election could be more consequential at the individual stock level. While policy detail is limited at this stage, key areas of interest will include parts of the insurance, healthcare, energy, and real estate sectors. 

Figure 5: The LNP Coalition is currently the narrow favourite to win the 2025 Federal Election
Figure 6: Historically the ASX has generally posted healthy returns under both Labor and Coalition governments
 

3. Trump 2.0 – Trade Risks vs Growth Tailwinds

With Donald Trump now formally inaugurated into office, the president’s ‘America First’ policy agenda promises both tailwinds and headwinds for ASX companies. 

One of the biggest risk factors of Trump’s second term is his threats of tariffs on trading partners. The Australian economy is positioned favourably in this regard. Unlike with many other countries, the US has a trade surplus with Australia (Australia imports more US goods than it exports to the US), and Trump has promised to maintain a ‘perfect relationship’ with Australia going forward. In any case, with Australian exports to the US representing <2% of GDP, even hefty tariffs (which isn’t our base case) would be unlikely to meaningfully impact Australia’s economy. 

Figure 7: The US has a trade surplus with Australia

With that being said, at the individual stock level, ASX companies that manufacture in China and export to the US face the risk of threatened tariffs. Examples include Breville (Focus Portfolio holding), Reece, and Reliance Worldwide. In the case of Breville, pleasingly, the business has been actively mitigating risks by building inventory in the US and shifting manufacturing out of China. 

On the other hand, the Australian market benefits from favourable linkages to the US economy. US revenues now represent ~10% of ASX 200 earnings, due to a growing collection of ASX businesses with meaningful operations in the US. These stocks provide exposure to the tailwinds of Trump’s pro-growth agenda. They should benefit from strong top-line growth (associated with stimulatory spending, deregulation and potential tax cuts) as well as a strong US dollar, as US earnings are translated back into a soft Australian dollar.

Figure 8: The Focus Portfolio is meaningfully exposed to companies with US earnings
 

4. China – Awaiting Stimulus Detail

The structural decline in China’s economic growth – and its transition towards a consumption-led economy – presents risks for the Australian economy, particularly for the resources sector. 

The key swing factor for resources demand in 2025 will be the degree to which China stimulates its economy. China’s commitment to ‘appropriately loose’ monetary policy and ‘more proactive’ fiscal policy suggests that additional stimulus is on the way in 2025, albeit specific detail has been limited at this stage. We expect further stimulus to provide broad-based support for commodity demand, although we remain selective with our resources positioning. 

Our preference is towards commodities with tight supply backdrops that should drive deficits, irrespective of China’s ultimate stimulus response. 

The Focus Portfolio’s key commodity exposures are towards copper (Sandfire Resources, MAC Copper) and aluminium (South 32). 

We remain cautious towards iron ore, with Chinese housing starts anchored at multi-year lows and the market remaining significantly oversupplied. 

While stimulus should provide downside protection to China's property market and iron ore prices in 2025, measures are unlikely to result in a new wave of property/infrastructure investment like we have seen in the last two decades. 

Figure 9: China’s economy is slowing structurally and will not return to its pre-Covid pace
 

5. Will the IPO Market Take Off in 2025?

After a multi-year IPO drought, there is optimism across the market that 2025 will represent a turning point for new listings on the ASX. 

While the timing of a recovery is inherently uncertain, renewed activity in the IPO market in late 2024 – including the floats of DigiCo Infrastructure REIT and Cuscal, which both followed the highly successful IPO of Guzman Y Gomez – could provide the necessary confidence to other companies looking to list on the ASX in 2025. 

Interest rate cuts from the RBA should also bolster confidence for companies that have been waiting ‘on the sidelines’ to list on the market. 

This theme is most relevant for Macquarie Group’s (Focus Portfolio holding) earnings growth outlook, which hinges on improvements in capital market activity within its investment banking division, alongside a pick-up in asset realisations (particularly for green assets) within its asset management segment. 

Figure 10: The ASX is in a multi-year IPO drought
Figure 11: Consensus expectations are for Macquarie’s investment banking earnings to improve over the next twelve months
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Written by

Greg Burke, Equity Strategist

Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.

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