Paul Xiradis
While the market remains bearish for financial year 2025, our view is for positive earnings growth in FY25 and into FY26. We believe earnings growth will recover in FY25 more than the market expects – broadening across sectors, and moving down the market cap spectrum.
(Current market consensus shows almost negligible earnings growth (EPSg) for FY25 followed by two mid-digit EPS growth years of +8.0% and +5.0% for FY26 and FY27 respectively.)
Ausbil is of the view that expected EPS growth will improve in an easing environment with no recession, improving economic growth and near full employment.
We see relief for balance sheets and income statements from a number of factors. We expect to see the RBA commence easing their monetary policy in 2025, joining the Fed, ECB and other developed markets. This will add relief on cost of debt and rollovers.
As inflation has been falling this will also add positively to income statements. Wages are still relatively in control.
On the impact of China, the September surprise rate cut of 50bps and the promise of further stimulus and support as needed has helped to stabilise the outlook for China leveraged companies.
The US election outcome with the return of President Trump was welcomed by the market on pro-business policies compared to higher taxes and other restrictions under the alternative. From an earnings outlook perspective, the US economy is expected to perform well under Trump in 2025, and onshoring policies and protection should be beneficial for the US economy.
However, the prospect of a trade war with China and Europe with rising tariffs could be a significant risk to earnings in a number of China facing sectors, including those whose manufacturing base is in China, and those that sell to China including resources. We are monitoring these risks closely, but earnings growth should benefit overall with a pro-business US government.
Australia is also expected to benefit from its growing export exposure to the Indo Pacific (ex-China) region with growth rates currently running in the range of 5% to high 6% for India, Indonesia, the Philippines and Vietnam.
By way of background information, in September 2022 Australia joined the Indo-Pacific Economic Framework (IPEF) alongside 13 members from across the Indo-Pacific region, including Brunei Darussalam, Fiji, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Republic of Korea, Singapore, Thailand, the United States and Vietnam. The region accounts for around 40 per cent of global GDP and includes eight of Australia’s top ten merchandise trading partners.
In terms of unpredictable risks, geopolitics is probably the most relevant. War in the Middle East remains a risk to the price of oil and supply chains. The war in Russia and Ukraine carries some existential nuclear risks. These risks are unpredictable, but at this stage we do not expect material market disruption. Further, under Trump we expect these risks to dissipate.
Opportunities
We believe decarbonisation and the energy transition remain significant themes that will drive value across resources, energy, utilities and the mining services sector with respect to critical commodities.
The rapid normalisation of rates in 2023 and 2024 was especially punishing on commodities given the impact this had on slowing economic growth. However, as we had been forecasting, the economy did not enter recession, growing at a sub-trend positive through 2024. With an outlook for improving growth in 2025, we are starting to see commodities shifting upwards again.
Copper is expected to see major demand upside from decarbonisation, a three-fold build out in global grids by 2030, increased demand from data centres with booming AI, and increase demand for EVs and battery storage.
Though it has had a tough 2024, we still expect lithium to see major demand growth alongside rare earths for battery storage and the electrification of things. Companies such as IGO, Pilbara Minerals, Lynas Rare Earths and Sandfire Resources will benefit from this demand. So will BHP and RIO which have major copper divisions.
As the world increasingly looks at the potential for nuclear energy to underpin the base load transition, supporting uranium as an energy source with much lower operating greenhouse gas emissions than traditional fossil fuels.
In bulks, we see ongoing demand from China for iron ore, growing demand from India for metallurgical coal, and global demand for steel, including US demand from stronger housing, decarbonisation infrastructure, renovation and remodelling.
The market is showing a wide dispersion of opportunities, and many in companies that are globally facing and market leaders in their sectors.
With an improving growth outlook, we are seeing opportunity in cyclical names. This includes resources as I have noted, the construction materials and consumer discretionary sectors. We have been incredibly selective in theses cyclical sectors, with names such as Wesfarmers, James Hardie in construction materials, and Aristocrat Leisure.
Banks tend to be a good proxy for the economy. With economic growth improving and the potential for monetary easing to support consumer spending, we think that some exposure to the best bank and diversified financials is important in 2025. We are overweight in names like National Australia Bank and Macquarie Group.
With respect to the outlook for lower rates in 2025, we are seeing opportunities in real estate in an environment where cap rates are likely to compress albeit moderately. Real estate has benefited from rental ratchet clauses that capture inflation upside, and will continue to benefit from higher rents in a lower inflationary environment, however the sector overall has been in a long structural adjustment following the rapid adoption of online since then pandemic. Goodman Group has been a preferred real estate exposure given that it is benefiting from two major thematics, the rise of smart logistics warehouses for online fulfillment and distribution, and the rapid uplift in demand for data centres.
On key thematics, in technology we are seeing structural earnings growth in technological transformation, the rise of artificial intelligence (AI), and the enablers and businesses that increasingly operate in the digital environment, including communications companies.
The current secular expansion of data, cloud computing, AI and storage is driving huge investment in the enablers of change. This includes semiconductor providers like NVIDIA and BE Semiconductors, a sector not available in Australia. However, other areas include data centres, energy and energy storage that back-up data processing, telecommunications and internet companies that support the web of connectivity and data. Examples of companies that stand to benefit include NextDC and Telstra.
The companies that stand to benefit from this technological enablement are those that can leverage the networking and processing power offered by enablers to capture more business, more customers and at lower and lower costs. Examples of such companies include Block, REA, Life360 and WiseTech.
There are always quality names in our portfolios that manage to consistently grow earnings, such as CSL, Xero and REA Group.
Overall
We believe the market will trade higher next year, driven by lower rates, improved earnings, and the macro-economic outlook, with the possibility of increasing corporate activity.
For companies with positive earnings growth outlooks that exceed consensus, it is definitely ‘risk on’.
Consensus currently has low expectations for FY25 earnings growth in a market which is likely to be positive for business. We think that earnings will be better than expected by the market for FY25, and we are less focused on defensive names and more invested in growth and cyclical names to take advantage.
By Paul Xiradis, Executive Chairman, Chief Investment Officer and Head of Equities