Investment Insights | December 2024

Key messages

Government debt levels cause investor angst. The Trump administration is likely to see the rising trend in debt to GDP increase further as fiscal spending accelerates, thereby increasing the bond market term premium (higher yields).
Aussie dollar under pressure as the US dollar strengthens. The Australian dollar has weakened against the US dollar, in line with global peers since the US elections, driven by expected policy changes from the incoming Trump administration.
Significant trade policy uncertainty. Trump has used tariffs as a negotiating tool in dealing with US trading partners. This has led to a spike in the overall levels of uncertainty as it relates US trade policy, the implications of which remain unclear until Trump officially takes office.
Tailwinds for US small and mid cap equities. Earnings growth for US small and mid caps are expected to accelerate and outpace that of large caps in 2025.
Seasonality in equity market returns. Equity markets have historically produced strong returns in December, but seasonality also suggests a level of caution heading into 2025, especially after two consecutive years of equity market exuberance.

Global economic scenarios

Govenment debt levels cause investor angst

Persistent budget deficits and excessive government spending have significantly increased levels of government debt as a percentage of GDP across developed countries.

Australia’s debt-to-GDP ratio of 43.8% is on the lower end of the global spectrum but has deteriorated from 19.2% in 2019.
US debt levels have trended higher, and the Trump administration is likely to see the rising trend in debt to GDP increase further as fiscal spending accelerates.

The rising debt levels and subsequent interest payments required to service the debt have led to an increase in the term premium and the risks associated with holding longer-dated government bonds.

While cognisant of the long-term risks, the recent rise in domestic and US bond yields, combined with potential risks to economic growth, particularly domestically, support maintaining a tactical exposure to government bonds.

Aussie dollar under pressure as the US dollar strengthens

The US dollar has strengthened since the US elections, maintaining its positive momentum. The Australian dollar has weakened in line with global peers.

Deregulation, tax cuts, and tariffs all point to a stronger US dollar in the short term. Higher US bond yields also provide support for the US dollar.

The US dollar is structurally overvalued but can remain so for a prolonged period.

Currencies of emerging markets and major trading partners with the US are set to face economic headwinds until there is some certainty on trade policy.

We remain cautious on broad emerging market and European exposures while positive on US dollar denominated assets. The
Aussie dollar is likely to retrace some of the recent selloff, but we have a bearish bias within a broader trading range.

Significant trade policy uncertainty

Uncertainty around US trade policy has spiked as the Trump transition team announces intentions to raise record tariffs on all imports to the US.

China is at the forefront of tariff increases, but neighbours Canada and Mexico are also targeted with talk of 25% tariffs on imports. Trump has used tariffs as a negotiation tool, but the realised levels of tariffs have been less than initially touted.

Tariffs would be negative for global growth in 2025 and would offset growth from the fiscal stimulus expected from the Trump
administration, the degree to which remains uncertain.

Uncertainty will remain around the quantum, timing and impact of conflicting policies across regions and sectors. On balance, the outlook for US growth remains more favourable than global counterparts.

Tailwinds for US small and mid cap equities

Earnings growth for the S&P 600 (small caps) and the S&P 400 (midcaps) are expected to accelerate and outpace that of S&P 500 (large caps) in 2025.

The expansionary fiscal policy of the Trump administration also provides further support for domestically orientated companies who make up a much larger portion of the small and mid cap sectors.

Our view remains constructive on US small caps given the combination of earnings growth and improved investor sentiment
towards the sector.

Seasonality in equity market returns

Financial markets tend to exhibit consistent seasonal patterns.

December is typically a strong month for global equities and the second-best month of returns for the ASX200.
Following the historically positive “Santa Claus rally” period, equity market returns clearly soften at the beginning of the new year.

This implies a level of caution heading into 2025 after two consecutive years of equity market exuberance.