28 Feb Monthly Commentary: February 2025

Market Trends: January 2025

Asset class performance

• Steadier bond yields helped produce better returns for growth assets in January after a steep rise in yields saw weaker growth asset performance in December. December’s yield increases, in turn, reflected confirmation by the US Federal Reserve of scaled-back rate cut expectations for this year.
• A major positive development in January was a lower than expected US inflation result, which bolstered hopes for further Fed rate cuts this year. Partly countering the positive impact on equities was China’s threat to US leadership in the AI space through DeepSeek, along with the threat of higher US tariffs under President Trump.
• In Australia, markets were buoyed by a lower than expected Q4 inflation result that heightened expectations for an RBA rate cut this month.
• Among defensive assets, fixed-rate bonds benefited from a modest decline in bond yields, which also supported gold prices.
• Among growth assets, Australian equities outperformed global equities.

Source: Bloomberg, Betashares. Cash: Bloomberg Australian Bank Bill Index; Australian Bonds: Bloomberg AusBond Composite Index; Global Bonds: Bloomberg Global Aggregate Bond Index ($A hedged); Gold: Spot Gold Price in $US; Australian Equities: S&P/ASX 200 Index; Global Equities: MSCI All-Country World Index in local currency and $A currency (unhedged) terms. Past performance is not indicative of future performance.

Defensive assets

• As noted above, bond yields were broadly steady over January,  helping fixed-rate bond returns.
• US 10-year bond yields eased 0.03% to 4.54%, while Australian 10-year bond yields lifted 0.07% to 4.43%. Credit spreads remained tight.
• The market now expects only one to two Fed rate cuts this year, while the RBA is expected to cut rates by 0.75%.
• Helped by easing bond yields, gold rose 6.6%.
• Further declines in inflation and prospective central bank rate cuts bode well for lower bond yields this year, through higher inflation induced by higher global tariffs and unfunded US tax cuts are new sources of risk.

Growth assets

Global equities

• Easing bond yields helped push up the global equity price-to-forward earnings (PE) ratio by 2.8% in January to 18.6. With forward earnings inching up 0.4%, the MSCI All-World Index returned 3.2% in local currency terms, and 2.6% in unhedged $A terms.
• With the global PE valuation relatively elevated at 18.6, lower bond yields should help support valuations. Earnings growth expectations also continue to suggest solid growth in forward earnings over the coming year. That said, recent earnings downgrades – which have led to flatter forward earnings growth in recent months – bear watching.

Source: Bloomberg, LSEG, Betashares. Global Equities: MSCI All-Country World Index. Global Bonds: Bloomberg Global Aggregate Bond Index ($A hedged). You cannot invest directly in an index. Past performance is not an indicator of future performance.

Among select global equity ETFs, the Nasdaq (ASX: HNDQ), banks (ASX: BNKS) and gold miners (ASX: MNRS) retain the best relative performance trends.

Source: Bloomberg, LSEG, Betashares. Relative performance versus the MSCI All-Country World Index (local currency terms) for the indices which the relative ETFs track.  You cannot invest directly in an index. Past performance is not an indicator of future performance.

Australian dollar

• The Australian dollar has fallen sharply since end-September – from US69.1c to US62.2c by end-January – and remains under downward pressure. Key drivers of the weakness have been strength in the US dollar and an increase in the US interest rate outlook relative to that of Australia. Iron-ore prices have been broadly flat over this period despite lingering global concerns over the Chinese economy.
• As noted above, markets now expect the RBA to cut rates by more than the US Fed this year, and the prospect of US tax cuts and a potential global trade war are also supportive of the US dollar more broadly.

Australian equities

• Australian equities also benefited from steadier bond yields and a 5.7% lift in PE valuations in January to 18.6. Forward earnings edged down 1.1%, resulting in an overall price return for the S&P/ASX 200 of 4.6%.
• As is the case globally, relatively high valuations leave the local market vulnerable without a decent decline in bond yields. Expected growth in forward earnings is also about half the 10-12% expected globally, with local earnings downgrades evident over the past year. That said, the  recent bounce in earnings expectations is a hopeful sign.

Source: Bloomberg, LSEG, Betashares. Australian Equities: S&P/ASX 200 Index. Australian Bonds: Bloomberg AusBond Composite Index. You cannot invest directly in an index. Past performance is not an indicator of future performance.

Among select Australian equity ETFs, technology (ASX: ATEC), financials (ASX: QFN) and quality (ASX: AQLT) retain the best relative performance trends.

Source: Bloomberg, LSEG, Betashares. Relative performance versus the S&P/ASX 200 Index for the indices which the relative ETFs track.  You cannot invest directly in an index. Past performance is not an indicator of future performance.

This article was originally produced by David Bassanese from BetaShares. You can read the full article here.

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