Market & Economic Update – April 2025

Australian Equities

The Australian equity market started the year with great gusto with key economic metrics broadly supporting the market. This swiftly turned in February and the local bourse continued to fall throughout the remainder of the quarter. The slide was largely due to the uncertainty over US President Trump's tariffs. Fear and speculation finally became reality as the index began its steep decent in early February, falling circa -10.3%; an official correction and potentially heading towards bear territory and global recession. The Australian market reacted sharply and negatively to the Trump tariffs during the March quarter and overall experienced its steepest losses since the onset of the COVID-19 pandemic. The Australian equity market ended the quarter down (-2.8%).

Amid the February reporting season, geopolitical issues saw investors scrambling to determine which sectors and companies would be hit the hardest. Earnings misses and lack of forward earnings outlooks contributed to a mixed bag of results, weaker when compared to 2024. Overall, earnings per share (EPS) growth expectations for the full 2025 fiscal year deteriorated across the February reporting season.

At the sector level, the market suffered broad based losses with the exception of more defensive sectors. Telecom Services +6.7%, Industrials +2.6% and Utilities +2.2% led the way as the more defensive sectors outperformed. Information Technology (-17.5%) was the biggest loser as a general risk-off mood gripped the market. Healthcare (-9.1%), concerns surrounding potential US policy changes and implications, and Energy (-5.2%), falling crude oil prices and general tariff concerns, were amongst the biggest laggards.

With regard to investment style and factor, the value style held up relatively well whilst Momentum (-7.1%), continued its correction, and Growth returned (-3.3%). Across the market spectrum, whilst both large and small companies fell, small companies surprisingly outperformed large companies in the period.

International Equities

Global equity markets, broadly, started the quarter well, optimistic that a pro-growth President would continue to drive markets higher. U.S. company Q4 earnings had been positive whilst the Eurozone was also experiencing some joy as valuations became too cheap to ignore, coupled with a rotational kicker as investors rotated out of U.S. tech stocks, off the back of Chinese AI start-up DeepSeek releasing an open source lower-cost AI model.

As the quarter progressed, volatility and uncertainty increased significantly as the level and implications of tariffs began to sink in. Stubbornly high inflation and the potential threat tariffs would have on inflation, resulted in central banks having to pause and rethink policy. This placed the level of potential rate cuts in jeopardy. Markets didn’t like this and reacted accordingly. Much-hyped technology stocks, which had been driving the overall market since the pandemic, experienced a rapid and pronounced sell-off mainly due to concerns over excessive AI spending, high valuations and doubts on future profitability. It seemed the momentum trade had come to end, at least temporarily, as investors rotated out of over-priced U.S. equities (several of the U.S.’s major corporations had been hit hard by the tariff news) and into either cheaper, undervalued European equities or safe-haven assets like U.S. treasuries, utilities and consumer staples.

In USD terms, the U.S. market (S&P 500) fell (-4.7%) for the quarter. The tech heavy Nasdaq, after a brutal mid-quarter sell-off, delivered a disappointing (-10.3%) for the quarter, not helped by the so-called ‘Magnificent 7 which felt the brunt of the sell-off, tumbling approximately (-15.7%).

At the sector level, the rotation out of momentum driven sectors began in earnest as investors sought greater risk-adjusted opportunities. Energy +10.2% and Healthcare +6.5% led the way with Consumer Discretionary, continuing its bumpy ride (-13.8%) and Information Technology (-12.6%), the laggards.  

Factor-based returns were led by Low Volatility +7.3%, which was not surprising as investors sought the sanctuary of safety, whilst High Beta (-11.5%) and Growth (-8.5%) led the falls as investors became concerned with future global growth prospects.

In Australian dollar terms, the broader global equity market dropped (-2.0%) for the quarter; Eurozone equities gained an impressive +9.6% for the quarter as Germany began the push to increase fiscal spending and stimulate its ailing economy. In the UK, the FTSE 100 returned +8.7% of the back of the rotation out of highly priced U.S. equivalents; while Japan equities lost (-5.9%).

Emerging Markets outperformed developed markets for the quarter although remaining under pressure. A weaker USD and a hot China market were overall supportive of EM. The benchmark index rose a moderate +2.3% for the quarter, however continuing USD depreciation and potential tariff-driven supply chain shifts could have more positive affects as the year progresses. The China equity market benefited by AI optimism and a rise in overall sentiment rose an incredible +14.5% for the quarter. In other regions, Latin America, driven by currency appreciation versus the USD and strong Brazilian performance returned +11.9%; whilst Asia overall, with a tariff cloud hanging overhead, returned an anaemic +0.7%.

Property & Infrastructure

Australian Real Estate Investment Trusts (AREITs) continued their freefall, declining sharply in the quarter. After a promising January, heavy losses in companies including Goodman and NextDC helped drag down the whole sector driven by weakness in global technology stocks, whilst the higher for longer bond yield narrative continues to weigh on valuations.

The domestic listed property sector fell a disappointing (-6.8%) during the quarter. In contrast, global listed property provided more resiliency, though with plenty of sector and region performance divergence during the quarter. A rotation into the defensive sectors such as healthcare and single-family homes was also a key factor of the quarter. The benchmark Global REITs index rose +1.1% for the quarter. Although the U.S. dollar has softened post quarter, it remained fairly flat relative to the AUD throughout Q1.

Global listed infrastructure outperformed broader equity markets in the March quarter, however policy and tariff concerns will continue to place pressure on valuations in the medium-term. Regulated utilities continue to lead the way due to their defensive nature, which seems paramount in this current environment. Europe proved to be the dominant region in the quarter, outperforming highly priced U.S utilities. Energy infrastructure continues to be supported by robust energy transition and midstream earnings. The global infrastructure index rose +4.3% for the quarter.

Bonds and Cash

Bonds generally posted solid returns in the March quarter with both U.S. and Australian Treasuries and Credit rallying off the back of interest rates moving lower. A notable shift in the global macroeconomic landscape during the first quarter was clearly visible. Bond volatility as measured by the MOVE, increased significantly by circa 27%, further emphasising the change in market dynamics.

As softer U.S. economic data continued to be released during the quarter, investors gravitated towards less risky assets as U.S. Treasures found favour, and credit spreads widened. Aggressive tariffs and sinking investor confidence led to a ‘flight to quality’ resulting in massive outflows from High Yield, to either Investment Grade or the safety of treasuries. Outside the U.S., European bonds rallied, driven by gains in the U.K., France and Germany; whilst Japanese government bonds underperformed all major markets, with rising yields amid strong Q4 GDP growth of 2.2% and rising inflation.

The U.S. Federal Reserve took no action at its March meeting, leaving policy rates unchanged throughout the quarter. The RBA lowered the cash rate target to 4.1 per cent from 4.35 per cent, signalling the first cut for more than four years, however remained quite coy about future cuts. The European Central Bank (ECB) and the Bank of England (BoE) were the other major central banks to cut in the March quarter, whilst the People’s Bank of China (PBoC) kept rates unchanged for a fifth straight month. The Bank of Japan (BoJ) raised its key short-term interest rate by 25 bps to 0.5 per cent, the highest level since 2008, and indicated plans for further rate increases and reduced monetary support should economic and price data align with its forecasts.

The U.S. 10-Year Treasury encountered major movements throughout the quarter but ended by falling slightly. The Australia 10-Year bond yield experienced similar erratic movement, also falling slightly by the end of the quarter. Although both falling, anything above 4% remains problematic for policy administrators.

In terms of total performance, Australian treasury bonds gained +1.2% for the quarter, whilst Global Treasury bonds (hedged) returned +0.7% for the quarter.

Credit market spreads, both investment grade and high yield, continue to remain at multi-year lows however both did increase during the quarter. The Global Credit index (hedged) added +1.1% in the quarter, whilst the Australian corporate market also returned a positive +1.5% for the quarter.

Emerging market local currency bonds posted robust positive returns in Q1 2025, with returns broadly driven by a weakening USD. In foreign exchange markets, the U.S. dollar fell against the Euro, the Yen, the Pound Sterling and most emerging markets currencies.

Following a remarkable run in 2024, capital flows shifted into non-U.S. assets in Q1 as the DXY, which measures the strength of the USD against a basket of major currencies, fell (-3.95%). Although range trading for the past two and half years, the USD has been on a slow decline since its last peak in October 2022, falling circa 8%. It still however remains relatively strong. The Australian dollar ended at 0.6247 USD, rising +0.93% for the quarter.

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Quarter In Review

Every so often we get a quarter where the events immediately after the quarter make the period in question seem like a distant memory……this was certainly one of them!

However, upon review it was still an action-packed quarter.

January got off to a good start for markets, following a weak December. Chinese artificial intelligence (A.I.) made its way on to the global stage with DeepSeek revealing potential advancements in both computing power and energy efficiency. This spurred investors back into Chinese equities, and Chinese tech in particular, which saw further outflows from Indian equities; whilst US tech investors took stock of the potential competitive threats to US A.I. superiority.

The change in investor priorities saw the beginning of a rotation out of last year’s winners into unloved or under-owned parts of the market, including China, Europe, and value stocks more broadly. On the central bank front, we saw the US remain on hold and the European central bank cut again, whilst the Indian government and central bank unleashed stimulus to buffer their weakening economy; being acutely aware of looming US tariff effects. Chinese economic data continued to see some improvement, off a low base, with firms front-loading manufacturing and production again with looming US tariffs on the horizon.

Donald Trump was inaugurated as the 47th US President which ushered in a raft of executive orders, most of which investors took well. This positive momentum continued into early February supported by robust US company reporting season results. Australian reporting season results were also reasonable but culminated in unusually high volatility. Central bank rate cuts also provided a positive impetus for investors with the Bank of England, Bank of India, and our own RBA obliging.

Investor sentiment then soured as Trump delivered on key election promises to secure the US border which included significant tariffs on Canada and Mexico, along with China (fentanyl), with China retaliating back almost immediately. Additional tariffs included 25% on all aluminium and steel which impacts Australia. The tariffs on the US’s key trading partners, along with the ongoing investigations into government expenditure (DOGE), saw US leading economic indicators take a dive for the worse, with sagging consumer/business confidence and sentiment given potential inflationary impacts of the former and economic growth detractors of the latter.

On the political and geopolitical front, negotiations got underway to try and resolve the Russia/Ukraine and Israel/Hamas conflicts and Germany ushered in a new leader from the centre-right party. The change in leadership in Europe’s largest economy also saw the Germans break with long-standing self-imposed fiscal constraints, announcing large infrastructure and defence spending plans, with the European Union also announcing their own large defence spending plans. The moves came as US / Ukraine negotiations flopped in a public forum which saw the US cease all aid to Ukraine. The significant spending initiatives saw additional support for European equities, and new support for the Euro, whilst European bond yields surged higher.

The much talked about tariff announcements from February saw implementation in March with additional new subsidies for US agriculture which saw retaliation from China. Markets didn’t like the size of the tariffs, particularly against US key trading partners, with US inflation expectations rising on fears any tariff-induced inflation may make it harder for the US Fed to provide interest rate relief. China data also began to show signs of weakness again, with much of the front-loading of economic activity ending abruptly. Closer to home, Australian employment data was significantly weaker than expected, showing the first signs of cracks appearing.

The US Fed kept interest rates on hold again but made rather material adjustments to their inflation (higher) and economic growth expectations (lower) for 2025.

To round out the quarter on the political and geopolitical perspectives, the US launched an offensive on Yemen’s Houthis in order to protect US (and Western) shipping lane access. Russia and Ukraine reached a deal for partial ceasefires, whilst the US restarted some aid to Ukraine.

The Australian federal budget was released in the quarter with the Labor government delivering an underlying cash deficit on the eve of an election, as the Albanese government pitched for a second term. The budget came with surprise tax cuts but showed an expected worsening in both deficits and debt over the foreseeable future in trying to keep the economy afloat.

The quarter rounded out with investor trepidation as April 2 loomed – “Liberation Day” as termed by Trump and his administration – with significant tariff announcements expected including much anticipated reciprocal tariffs. Fair to say investors, and much of the world, held their breath in anticipation.

All in all, an action-packed quarter with trade tariffs and geopolitical uncertainty, A.I. disruption threats, monetary policy divergence, renewed inflation concerns, sector and country rotations within equities, and fiscal stimulus in Europe.

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Outlook

Looking ahead, it’s clear that investor sentiment and economic outcomes will be dominated by tariff / trade news along with US Treasury initiatives including debt refinancing and budget deficit reductions, and a ramp up in US oil production.

Key will be the trajectory and landing spot for the US economy, global growth more broadly given the backdrop of deglobalisation, navigating through tariff-induced volatility impacting consumer and business confidence and inflation; and increasingly complex geopolitical tensions.

These present both risks and opportunities given the likely weaker economic period ahead, the potentially inflationary imposts of tariffs, and the rather quick fashion in which some of these issues can be resolved.

For now, given the state of flux on tariffs, we’re adopting a more cautious approach to the outlook with increased vigilance and monitoring. In these environments, we remain agile, well diversified, and focused on identifying higher quality opportunities with valuation support.