MONTHLY ECONOMIC & INVESTMENT REVIEW: MAY 2025
1. Executive Summary
Global equity markets rebounded in May 2025, supported by a temporary pause in US-China tariff escalation and dovish central bank signals. However, we remain concerned that equities are pricing in little economic risk, particularly in the US. Australian markets benefited from commodity price strength and expectations of domestic rate cuts. Portfolio positioning remains modestly defensive, with a preference for cash, quality fixed income, and select international equities.
2. Financial Markets Performance
• Global Equities: MSCI World +2.0% in May. S&P 500 +4.6%. Euro Stoxx 50 +1.8%.
• Australian Equities: ASX 200 +4.2% in May. Materials and Health Care led.
• Government Bonds: US 10-year yield rose to 3.85%. Australian 10-year at 3.70%.
• Credit Markets: Spreads widened slightly in May as investor caution returned.
• Real Estate: Australian REITs +3.1% in May. Global property markets are stabilizing.
• Private Equity & Infrastructure: Mixed performance. High cost of capital is a headwind.
• Commodities: Gold +2.5%, oil -1.8%, copper flat.
3. Global Macroeconomic Overview
• United States: Growth remains resilient, but capex intentions are falling due to policy uncertainty. Inflation is moderating, yet sticky components remain elevated. The Fed remains cautious.
• Eurozone: Economic activity is sluggish but stable. Core inflation has eased, providing space for gradual policy normalization by the ECB.
• China: Growth softened, with declining commodity imports in May highlighting weakness in industrial demand. Stimulus is likely but remains targeted.
• Emerging Markets: India outperformed with strong equity market returns. Brazil’s inflation declined, supporting local monetary easing.
4. Central Bank Interest Rate Policy
• United States Federal Reserve: Held rates steady in May. The Market appears to be pricing a further 1-2 cuts by year-end based on continued slowing growth.
• European Central Bank (ECB): Has maintained a data-dependent approach to its interest rate policy. This suggests a strategic easing of monetary policy to support economic growth and manage inflation.
• Reserve Bank of Australia (RBA): Reduced rates by a further 0.25% in May, taking the official cash rate to 3.85% and hinting at further rate cuts amid weak inflation and slowing wage growth.
• Other Major Central Banks:
o Bank of Japan (BoJ): No interest rate increases in May despite yen weakness.
o Peoples Bank of China (PBoC): Targeted easing measures remain in place.
o Bank of England (BoE): Hawkish bias tempered by weakening economic data.
5. Australian Economic & Market Outlook
• GDP Growth: Flatlining in Q1 2025; quarterly growth at just 0.1%.
• Inflation & Wages: CPI eased to 3.4% y/y. Wage growth slowed, reducing pressure on interest rates.
• Employment: Unemployment rose slightly to 4.2% with a stable participation rate.
• Sentiment: Consumer sentiment fell in May (Westpac-MI Index -2.5%). Business sentiment mixed (NAB Business Confidence index neutral).
• The RBA signalled rate cuts may be required by Q3 2025 if inflation continues easing. Forward markets price the cash rate at 3.30% by year-end.
6. Currency & Commodities
• AUD Performance: AUD/USD fell to 0.648 in May amid weaker commodity prices and soft economic data.
• Key Commodities:
o Iron Ore: Prices are volatile but supported by limited supply.
o Coal: Prices firmed on higher Asian demand.
o Gold: Bullish momentum continued, driven by USD weakness.
o Oil: Weakened slightly due to OPEC+ output and softening demand.
o Lithium: Stabilized after Q1 declines.
7. Outlook
Equity markets rebounded in May, but we are concerned about the relatively high valuations, particularly with US stocks. There are some headwinds we see in terms of tariffs and the impacts these may have on capex spending and company earnings. Markets do not appear to be pricing in the potential negative impact on stock valuations and consequently we see better value elsewhere. Pacific Private Asset Management Pty Ltd (ABN: 38 666 379 317, AFSL: 550704) 4 Central banks are navigating a delicate balance between easing interest rates and maintaining a check on potential price inflation from US tariffs. For now, falling rates will act as a support for equity valuations. However, should we begin to see further earnings downgrades, then we will become increasingly cautious on returns from equities and are likely to further underweight our position to equities. Geopolitical tensions are once again on the rise. The bombing of Iran’s Nuclear facilities by Israel threatens Middle East stability and has the potential to escalate further. The Russian Ukraine conflict is also showing no sign of a resolution and also has the potential to escalate. With the exception of the rise in gold prices, the markets so far have taken a somewhat blasé attitude toward these risks. We are recommending that Portfolios remain modestly defensive (underweight growth assets) with selective opportunities in non-US equities, high-quality fixed income, and selective property and Infrastructure assets.
8. Portfolio Strategy & Asset Allocation
• Equities: Underweight US equities; neutral Australia; overweight Canada, UK, Japan, and EM. Preference for defensives: health care, staples, and utilities.
• Bonds & Credit: Favor short-duration and high-quality sovereigns. Cautious on credit spreads.
• Alternatives: Maintain allocations to gold, infrastructure, and private credit.
• Cash & FX Exposure: Overweight cash as dry powder. AUD hedging should be maintained due to a bearish USD outlook.
• Sectors: Resources (Australia/Canada), global healthcare, gold miners, and infrastructure-linked assets.
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