Mark Johnson, Partner & Chair of Prime Investment Committee
The State of Play in World Markets
As we enter 2025, the investment landscape continues to be complex and fast-moving. Recent years have shown considerable market volatility, with stark contrasts between soaring sectors and undervalued areas — a phenomenon now being described as ‘extreme polarisation’, reminiscent of the Nifty Fifty era in the 1960s and 70s.
U.S. Market Trends
In the U.S., technology giants like Nvidia have driven stock prices to extraordinary heights, setting expectations that may be hard to sustain. Nvidia, for instance, would need to maintain an annual earnings growth of over 35% for the next five years to justify its current valuation. This scenario mirrors the experience of Cisco in the late 1990s, which, despite its success in the early 2000s, saw its stock price struggle as earlier high expectations adjusted to reality.
Global Opportunities
Opportunities are unfolding in emerging markets, particularly in regions that have been less favoured by Western investors. For instance, China’s CATL, a leader in electric vehicle batteries, shows promising growth with valuations that are more grounded compared to its U.S. counterparts, making it an attractive prospect. Additionally, as emerging markets rebound post-COVID, many local companies are showing increased resilience against U.S. trade dynamics, positioning them well for potential growth.
The Australian Context
At home, the Australian banks are in an interesting position. Commonwealth Bank shares in particular have rocketed higher, bewildering even optimistic analysts. However, with high household leverage and a cooling property market, sustaining such growth remains questionable.
Market Outlook
What this all means is that in the short term prospects for the market appear strong, supported by significant liquidity, suggesting continued good performance. However, we are cautious about medium-term risks such as deflationary pressures, trade tensions, and currency fluctuations, which could destabilise the market. Over the long term, while aggressive central bank actions might initially support asset prices, there is a real risk that these policies could lead to stagflation by the late 2020s—a challenging scenario characterised by slow economic growth, high unemployment, and rising inflation all occurring simultaneously.
What We Are Doing About It
To help your portfolio navigate this challenging environment, our team is taking several steps:
- Emphasising Quality and Resilience: We are focusing on companies with strong balance sheets, stable earnings, and the ability to weather various economic conditions.
- Diversifying Geographically: By investing across regions, including emerging markets, we aim to capitalise on a broader set of opportunities and mitigate the risk of being overly concentrated in any one area.
- Considering Defensive Strategies: We are evaluating defensive and absolute return strategies that have the potential to provide steadier returns if volatility picks up.
- Maintaining Flexibility: We believe it is critical to stay nimble and adjust exposures quickly as conditions evolve. Our portfolio management process incorporates dynamic risk management.
- Thinking Long-Term: While we must manage short-term risks, we are ultimately focused on long-term value creation. Periods of volatility can create attractive entry points for patient investors.
- Exploring Inflation Protection: We are researching ways to incorporate inflation protection and real assets for the latter half of the decade
We are committed to ensuring that your investments are well-positioned for current and future challenges. Our team remains dedicated to discovering opportunities that offer attractive returns while managing risks effectively. If you have any questions about your investments or our strategy, please do not hesitate to contact us.
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