Overall, tariffs will result in upward pressures on supply chains, with input prices keeping US inflation somewhat elevated, and slowing the pace of global trade growth. Ausbil’s view on tariffs under Trump is that the US is expected to benefit at the marginal cost of higher inflation.

Despite rapid change, the global growth outlook remains positive

Global macro settings are expected to remain within their ‘back to normal’ levels in 2025 and 2026, supported by a shallower global easing cycle.

We are forecasting a sustainable step-up in global growth to 3.5% for 2025, elevated but stable inflation relative to central bank target levels and limited real rate cuts. The recalibration of restrictive policy settings appears to have run its course, closing in a new higher neutral level relative to recent history.

The US Federal Reserve has pivoted and paused rates in the target range of 4.25-4.5% as “inflation remains somewhat elevated.” The structural themes of decarbonisation and accelerating de-globalisation will continue under Trump 2.0, and will underpin activity.

Taken together, global GDP is continuing on a positive upward trajectory towards its trend rate. Underlying resilient private demand, business investment, employment growth, and easier financial conditions will sustain the expansion of the global business cycle.

We remain vigilant with respect to unpredictable geopolitical events, including the risk of underestimating the impact from Trump’s tariff policies.

We are forecasting a resilient US, and a modest recovery for Europe.  The US growth outlook sustained in the mid-2% range will be driven by Trump’s pro-growth and pro-business policies.

Growth is driven by a resilient labour market remaining at full employment levels, underlying strength in the consumer from real wages growth, a positive wealth effect and private capex investment. The US is experiencing a sustained productivity uplift, where the pace has stepped up to 2.0% from a low pre- pandemic 5-year average of 1.4%.

Europe experienced shallow growth conditions that felt more like a recession, especially for Germany. We are forecasting a gradual recovery in growth, assisted by European Central Bank rate cuts. Year average real GDP growth was a subdued 0.9% in 2024, following 0.4% in 2023 and 3.4% in the post-pandemic rebound of 2022.

Inflation is under control but will remain elevated

We are forecasting elevated but stable inflation relative to central bank target levels in the US and globally.

Core inflation dynamics continue to see persistent sticky services inflation (ex-housing), moderating housing inflation at a much slower rate, and upside risk from goods inflation from potential supply and tariff driven input price shocks.

You can stop worrying about recession

In our view, lingering market fears of a US recession are unfounded and the risk is mitigated by the fact that central banks have significant room to cut nominal rates if recessionary signals eventuate.

The global economy is on a positive upward trajectory in 2025, with lower inflation and real rate cuts.

We remain vigilant on unpredictable geopolitical events that may materially impact our view. 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.

That said, underlying resilient private demand, business investment, employment growth, and multiple rate cuts are expected to sustain the expansion of the global business cycle.

By Jim Chronis, Ausbil Chief Economist, Associate Director – Debt and Diversifieds

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What does Trump 2.0 mean for global small caps?

Before Trump 2.0, we had isolated several key themes that are driving portfolio construction. These thematics remain intact and in some cases, we expect them to be accelerated under Trump 2.0.

This includes the electrification of things, AI and data centre demand, and investment in grid upgrade and expansion.

These growth drivers have benefited from significant fiscal stimulus in the CHIPS Act and the Inflation Reduction Act.  Trump 2.0 is expected to add deregulation, tax cuts and a general pro-business approach to governing that we expect to be incrementally stimulative for the US economy, especially in sectors like energy, industrials focused on US manufacturing, information technology firms in the data centre and AI complex and companies leveraged to electrification and grid upgrade.

As an example, Celestica, is a market leader in data centre networking equipment, headquartered in Canada, is expected to benefit from ongoing investment in US data centres, AI and networking efficiencies. President Trump’s recent announcement of the Stargate AI project, a US$500 billion joint venture between OpenAI, Oracle and Softbank, highlights the robust investment environment in technology.

The clear and present risk we are monitoring is that of tariffs, and the potential impact on the US and world economy. Tariffs and potentially strong growth in the US could lead to inflation accelerating again which may require the US Federal Reserve to end their interest rate cutting cycle and potentially consider tightening interest rates.

However, many of the small cap companies in the US undertake a lot of their manufacturing domestically therefore they are heavily insulated from the effects of tariffs, unlike their foreign competitors. Ultimately this could give a boost to US small-cap companies.

By Simon Wood & Tobias Bucks, Co-Portfolio Managers Ausbil Global Small Caps

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What does Trump 2.0 mean for global infrastructure

Trump 2.0 comes amid the multi-year infrastructure stimulus undertaken by the Biden government, and which we believe is unlikely to cease under Trump.

From an infrastructure perspective, it helps to look at Trump 1.0 for some help in extracting fact from rhetoric. Under Trump 1.0, in contradistinction to the fearmongering on renewables and fossil fuels, coal was retired more under Trump than any other prior administration, and renewables grew, albeit modestly. In fact, fossil fuel investment actually increased again under Biden, though against a rapid increase in clean energy investment.

While Trump failed to win a consecutive second term, this subsequent second term offers him four years to achieve his goals. In energy, Trump is looking back at fossil fuels in the form of LNG as a base load power to stimulate onshoring for the coming four years, releasing volume that is readily available.

However, the latent time delays for other power sources like gas turbines, hydro and nuclear, suggest that Trump will necessarily need to be supportive of wind and solar renewables that can be readily expanded during his term to achieve Trump

Trump’s energy goals and his policy for onshoring, protecting and expanding US manufacturing is a major driver of pipeline infrastructure for the liquification and export of natural gas as LNG. Both pipelines and rail are expected to benefit from better growth, more energy shipping, onshoring and ‘made in America’ protectionist policies.

Across all infrastructure sectors, Trump deregulation is expected to spark more M&A, and just as Australia liberalised the market and precipitated significant M&A activity, we believe the US should follow, subject to state and anti-trust considerations.

Artificial intelligence and data storage will also add to energy demand. These are areas that are benefiting under Trump policy with the announcement of Stargate, and his close relationships with a range of technology leaders. In infrastructure, we are agnostic as to which AI models may become dominant (like DeepSeek, Gronk, Gemini, Chat GPT, etcetera) as infrastructure will benefit from the overall rise in energy demand. In general, we expect that improved macro-economic conditions and reshoring will benefit all infrastructure sectors.

Risks to avoid

The markets ran hard in calendar 2024, and while Ausbil is calling calendar 2025 a period of ‘risk-on’ given the positive economic conditions, we still acknowledge that there is a real risk around valuations. We think that improving growth, and pro-business policies will help reduce this risk. Tariffs are likely to cause some distortions, but for contracted infrastructure assets, the risks are relatively low.

There are also potential currency risks. The US budget deficit will expand with lower taxes and potential interruptions from tariffs, however, the potential is for onshoring and resurging US manufacturing to offset this with greater productivity. Finally, the nature of Trump foreign policy is such that hard dealmaking could precipitate more geopolitical volatility, though looking back at Trump 1.0, where no major geopolitical disasters occurred, it is hoped Trump 2.0 will be similar.

Positioning for the macro-economic outlook

As we progress through 2025, we believe essential infrastructure stocks remain positioned for continued growth despite increased market volatility. President Trump’s administration is expected to introduce fiscal stimulus and deregulation measures, which could benefit US infrastructure investments such as rail, energy and utilities.

The AI sector’s rapid development is set to drive structural increases in electricity demand, further supporting North American utilities and energy infrastructure companies. LNG exports continue to play a key role in global energy markets, including Cheniere’s Corpus Christi expansion nearing completion, in which we have a holding.

In Europe, uncertainty remains elevated due to political instability and macroeconomic concerns. However, select infrastructure assets continue to offer attractive opportunities.

While infrastructure stocks have faced headwinds from interest rates, the fundamental case remains strong. We see valuations as reasonable and continue to focus on high-quality, well- positioned companies. Our long-term investment thesis remains intact, with a robust pipeline of opportunities in energy, transport, and across the utility space.

By Tim Humphreys, Head of Global Listed Infrastructure

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Underlying resilient private demand, business investment, employment growth, and multiple rate cuts are expected to sustain the expansion of the global business cycle.

Despite significant negativity around inflation, interest rates and the global economy in general, several factors are making global equity markets attractive.

Global macro settings are expected to remain within their ‘back to normal’ levels in 2025. We are forecasting growth, lower inflation and real rate cuts. The structural themes of decarbonisation and slowing globalisation continue to underpin activity.

On economic growth

We are forecasting a resilient US and Europe on a modest recovery. The US growth outlook is driven by a resilient labour market remaining within close range of full employment levels, and underlying strength in the consumer from real wages growth and the drawdown in excess savings. Europe has exited very shallow recessionary conditions and is on a sustained recovery, assisted by further European Central Bank rate cuts. The Asia-Pacific growth engine will continue outpacing the rest of the world. China’s expansionary fiscal stance, monetary easing and latest measures to stabilise the property sector should sustain growth in the mid 4% plus range. Finally, Australia’s Gross Domestic Product (GDP) is expected to rise in the second half of 2024 and move higher through 2025.

Inflation

Inflation is falling, and the forecast trajectory is for a return to above central bank target levels out to 2025, in the US and globally. Core inflation dynamics are switching, and we see persistent sticky services (ex-housing) inflation, lower housing inflation to a lesser degree, and upside risk from goods inflation.

Outlook for rates

The US Federal Reserve is expected to deliver rate cuts in 2024 and into 2025. An ongoing improvement in Australia’s inflation dynamics should provide an opening for the Reserve Bank of Australia to adjust rates in 2025.

Two specific areas we like are listed global essential infrastructure and global small caps, both well placed to benefit from the global macro-economic outlook.

Listed global essential infrastructure

We see this over the next twelve months as being a combination of three things. Firstly, the short-term underperformance relative to global equities has led to what we believe to be a significant valuation upside opportunity.

Secondly, the benefits of recent higher inflation are yet to fully feed through into revenues and cashflow, and with inflation expected to remain above trend for the next few years, this benefit will take several years to be fully realised in higher profits. We do not think that the market fully appreciates this value. As inflation is falling, infrastructure assets are able to retain the upside in revenues while benefiting from cheaper funding in an easing environment.
Finally, the long-term secular growth drivers such as the energy transition and decarbonisation, repowering Europe, mobile phone technology transition from 4G to 5G, and the impacts of AI on the booming demand for electricity have never looked better for the infrastructure players in these spaces.

Global small-caps

Global small-cap equities are still clawing back their relative value position against larger companies following the rapid normalisation of interest rates in 2022 and 2023. In addition to underlying thematics like decarbonisation, upgrading the electrical grid, and artificial intelligence, we see the current easing bias in global rates as an additional tailwind for the sector.
The large fiscal stimulus provided by the US administration is a robust tailwind for US and global growth going forward and is expected to prevent any material recession in the Western economies.

We are expecting significant investment from European governments and utility companies into the European grid upgrade in the coming years. Specific focus areas that we see benefitting from this growth environment include the manufacturing renaissance in the US; onshoring; data centre investment and the evolution of artificial intelligence; and finally, the move to decarbonisation and the associated electrical grid upgrade. These catalysts continue to provide exciting investment opportunities within the global small-cap market.

Summary

This is a positive macro environment and represents good news for global equities. The global economy is on a positive upward trajectory, with lower inflation and real rate cuts. The US Federal Reserve has joined the growing list of central banks in the global rate cutting cycle which has been underway since the June quarter of 2024.
In the US labour market, we highlight the following features. The non-farm payrolls measure on a three-month moving average rate is back at pre-pandemic levels. The ratio of job openings to unemployed persons is back at levels when prior tightening cycles commenced.

The weekly jobless claims measure as a lead employment indicator has a run rate that is well below, and inconsistent with, market fears of a recession triggered by a surging unemployment rate.
In addition to these fundamental measures, financial markets are showing the US 2/10 year bond yield curve back with a normal upward slope from being inverted for the last two years, reflecting a series of cuts in the Fed funds rate. Moreover, non-investment credit spreads have narrowed year to date, the net worth of households has risen by 7.1% on a year ago, on rising equity and housing valuations, and the ratio of total private debt to gross domestic product declined further, approaching its historical average, with both business and household ratios lower.
Consumer debt servicing levels in the US appear manageable and have fallen for those with fixed rate mortgages, with credit growth flowing through to all sectors.

Finally, financial system stability is sound and resilient according to the Federal Reserve’s half yearly report. There is little sign of financial vulnerabilities triggered by valuation pressures, borrowing by businesses and households, financial-sector leverage, or funding risks.

We remain vigilant on unpredictable geopolitical events that may materially impact our view. That said, underlying resilient private demand, business investment, employment growth, and multiple rate cuts are expected to sustain the expansion of the global business cycle.

By Jim Chronis, Chief Economist, Ausbil Investment Management

The post Why 2025 is looking friendly for global equities – even before Donald Trump was elected appeared first on AdviserVoice.

Paul Xiradis

The world is now in the process of controlling COVID-19 with a range of tested vaccines just over a year on from the original declaration by the World Health Organisation on 11 March 2020 that COVID-19 was officially designated a ‘pandemic’. This is a remarkable achievement even though control of the virus remains a challenge.

We expect to see an acceleration in global growth to 6.6% in 2021, with the US set to grow 7.0% in 2021.

China was the first nation to emerge from lockdown in 2020. China is consolidating growth in the domestic economy and is expected to print an economic growth figure of  8.2% in 2021.

Advanced economies are forecast to grow at multiples of their 10-year average, with Europe emerging from a double-dip recession caused from its second lockdown. Ausbil is expecting  the Eurozone to grow by 4.7% in 2021.

Of all the pandemic stimulus packages, the US was far-and-away the largest, with the level of US fiscal support during the pandemic, so far, totalling US$5.2 trillion, 24.6% of nominal GDP, or three times the fiscal support given during the 2008 financial crisis. In addition, the Federal Reserve’s open-ended QE program is providing monetary support to the tune of 11% of nominal GDP to date. Ausbil’s current economic outlook is summarised below.

Risks

There are a number of risks to Ausbil’s outlook. Recently, markets have been concerned about  a permanent rise in inflation, what the recent rises in bond yields might mean for more persistent inflation, and the risk it poses to interest rate levels.

These fears are also caught up with concerns around any earlier Fed response than expected, or any tapering of QE sooner than expected, that is, before the 2024 milestone, which has been set based on the emphatic and repeated comments by both the Fed and the RBA. These risks are associated with an economic rebound that is too successful, or successful too quickly.

There are three conditions required before there is a lift-off in rates. Firstly, there needs to be a labour       market that is at maximum employment. Secondly, inflation needs to have been at ~2% for at least a year. Finally, the level of inflation needs to be on track to exceed the 2% level “for some time,” as noted by the Fed. These three conditions have never been simultaneously met in recent history.

Another risk is that growth actually underperforms, and the rebound is less than successful due to new COVID variants outpacing the efficacy of the current stable of vaccines. There also remains unquantifiable geopolitical and trade risks around the world, including the potential for regional conflicts in Iran/Israel, China/Taiwan, Russia/Ukraine, and now with actual conflict in the Middle East.

Ausbil’s view is that economies will run ‘hot’ for some time, with the support of policymakers, and are delivering the best growth figures since 1983, across a multi-year growth profile, as illustrated in the table above.

While inflation will remain an ongoing source of worry as the perennial flipside to growth, it is important to understand when inflation spikes are intermittent or if they are moves to a higher sustained level. It is our view, and indeed that of most global central banks, that inflation will not be a problem for some years as the world economy returns to health.

We see inflation remaining within  target ranges for some years, and cash rates on hold until 2024, with long bond yields to adjust over these years in an orderly fashion. Australia’s economic growth, and the current resources boom, will underpin the Australian dollar, with Ausbil forecasting the AUD/USD in an up-trend: 75-80c for 2021, 80-85c in 2022, and 85-90c in 2023.

This low-rate environment, and the multi-year economic growth outlook, is supportive of an underlying multi-year growth outlook for equities, especially in cyclical sectors, banks and in resources as world demand grows.

Earnings surprises

Two key sectors where we see further earnings surprise are the banks and resources sectors.

Banks, which offer primary exposure to a recovering economy, entered the pandemic after heavy barrage from the Hayne Inquiry and having already been sold down. The pandemic saw them sold down further on fears that the recession and COVID job losses would impact their lending books. All the banks provisioned majorly for the potential for credit loss, and APRA further enforced capital retention through limiting the dividends they were allowed to pay. Looking at the banks in the 2021     New Year, it was evident that the bad and doubtful debt experience was nowhere near predictions, and that the banks had over-provisioned for losses. With APRA allowing a return to more commercial             dividend levels, and the economy resurging from the 2020 lows, we could see banks were in a position to reduce these provisions and grow their books further in a renewing real estate market. The result is that over the next few years, the unwind of this over-provisioning will see a rerating of earnings, ahead of the consensus expectation at the time we began up-weighting into banks.

Metals and mining are in the midst of two fundamental themes in global resources investing. The first is the super-cycle demand for Australia’s bulk commodities including iron ore, from China in terms of building and infrastructure demand, and as a function of the growth path of the world economy. This theme is expected to drive earnings in companies like BHP, Rio Tinto and Fortescue Metals. The second is the fundamental shift in the energy transition to renewable energy, and the rapid adoption of electric vehicles, which is sparking a secular demand for bulk, base and battery materials (copper, lithium, cobalt, zinc, manganese and rare earths) that is expected to last for decades, underwriting the fundamentals of a strong resources market. This long secular ‘electrification’ demand is forecast to drive earnings in companies like Galaxy, Orocobre and IGO (in lithium), OZ Minerals (in copper) and Lynas Rare Earths.

Ausbil has been overweight banks and resources (metals and mining) for some time. These overweights remain in place across our portfolios and have driven outperformance across our different strategies. Importantly, we are still in the early stages of the economic cycle, with a positive growth outlook for multiple years that is expected to drive performance in these mega-sectors.

The portfolio is also tilted towards rebound stocks in travel and recreation (such as Qantas and Webjet) whose earnings are returning following the implementation of global vaccinations, as well as high quality industrials and healthcare names (like Ramsay Health Care) which are primary beneficiaries of economic recovery.

Where next?

Since the historic reversal in consensus across the February reporting season that saw the FY21 consensus earnings outlook for the broad market rebound from -1.6% to +15.6%, consensus earnings outlook for both indices has rerated to +19.08% (S&P/ASX 200) and +19.02% (S&P/ASX 300).

While these earnings figures are strong, Ausbil’s house view is that consensus is still under-estimating the rebound in earnings that will occur in the prevailing economic conditions, with rates to remain low, and with the world economy providing a tailwind to Australia’s current expansion.

In terms of the market itself, there are three important observations that can be made when looking at the earnings growth and levels. The first is that the consensus earnings outlook regularly misses the actual earnings by some margin, as illustrated by the blue and red bars in the chart. Moreover, in the expansion phase of 2004-2007, consensus significantly and consistently undershot actual EPS growth. What is interesting about this period is that it shows a multi-year expansion period of year-on-year positive EPS growth that could be similar to the period of earnings expansion we have just entered in 2021.

The second observation is that since the GFC, aggregate earnings have moved sideways, within a range. Market performance has been driven by significant P/E expansion in this time rather than earnings expansion. Ausbil’s outlook is for the return of strong multi-year earnings over the next 2-3 years, and possibly beyond.

Finally, markets are volatile and can rise and fall on anticipated and unanticipated information. However, comparing the market and EPS levels in Chart 3 over time shows that markets tend to rise when earnings are in a rising pattern, or conversely, the market is unlikely to fall significantly when it is in an earnings upgrade cycle.

Ausbil’s portfolios have been positioned for a clear path to recovery, but with some volatility and uncertainty along the way. We are expecting a multi-year earnings growth cycle, and we maintain the position that investors are compelled to participate. While we maintain a positive outlook on earnings, this is still a time to invest in only the best quality companies, which exhibit superior underlying earnings growth and strength, in order to achieve longer-term outperformance.

Comments by Paul Xiradis Executive Chairman, Chief Investment Officer, Head of Equities and Jim Chronis, Chief Economist

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