Overview

MONTHLY ECONOMIC & INVESTMENT REVIEW – JUNE 2025:

1. Executive Summary

Global equity markets rose during June despite persistent geopolitical tensions and trade uncertainty. Supportive factors included market optimism around interest rate cuts and steady consumer spending. However, concerns linger: cooling labour markets, elevated US tariffs, and signs of a potential economic slowdown. The strategy remains cautiously defensive—favouring quality fixed income, selective equities, and defensive sectors.

2. Asset Class Monthly Performance

  • MSCI World (Total Return, Hedged): +3.8%, S&P 500: +4.96%, Euro Stoxx 50: +0.8%, Japan 8.0%
  • ASX 200 Accumulation Index: +1.4%, new all time high in early June, led by energy & financials
  • Emerging Markets +4.1%
  • International Small Cap stocks +2.9%
  • Australian REITs: +1.7%, Global REITs: +0.6%
  • Global bonds: +0.7%, Australian government bonds: +0.8%
  • International Listed Property: +0.6%, International Listed Infrastructure: +0.2%
  • International Credit: +1.3%, Credit spreads tightened, boosting returns

3. Global Macroeconomic Overview

  • Geopolitical tensions in the Middle East escalated in June, with Israel and the US launching a military strike on Iran following failed negotiations over Iran’s nuclear program. The US subsequently announced a ceasefire, which currently remains in place. We have not made any changes to our views and positioning. However, we continue to closely monitor the situation for any signs of further escalation.
  • It is our central scenario that the new US tariffs and resulting uncertainty may cause a mild recession in the US and slow growth in other regions of the world.
  • Germany’s government spending should help Europe’s growth.
  • China’s economy might slow, but the government could respond with more spending to help.
  • In the UK, wage growth slowed considerably to 5.3% and unemployment climbed to the highest level in four years, during the three months to April. The unemployment rate rose to 4.6%, as job vacancies fell below their pre-Covid average.

4. Central Bank Interest Rate Policy

  • Most central banks are likely to gradually cut interest rates in response to slowing growth, except Japan, with increases expected, as inflation remains above target.
  • The US Fed left interest rates unchanged in June at 4.25-4.5%, while lowering the GDP growth forecast to 1.4% and the inflation forecast to 3.1%.
  • In Europe, the ECB cut rates for the eighth time, lowering the deposit rate by 25bps to 2%, in line with expectations.
  • Despite a widely anticipated rate cut in late June or July, the Reserve Bank of Australia surprised markets by holding its cash rate steady at 3.85%, boosting AUD bullish sentiment.

5. Australian Economic Overview

  • The Australian Purchasing Managers’ Index (PMI) is a good lead indicator of future economic activity. For June, it continued to indicate a slowdown in economic growth but remained just above a recession reading. New export orders declined due to weaker foreign demand.
    • The Australian labour market remains resilient, with unemployment remaining at 4.1%. Full-time jobs increased while part-time jobs declined, and the participation rate also fell.

6. Currency & Commodities

  • AUD Performance: The AUD/USD gained ~1.4% driven by an unexpected RBA rate hold, improved risk appetite globally, and seasonal tailwinds. The USD fell -2.5% in June,  its worst half-year since 1991.
  • Key Commodities:
    • Iron Ore: Prices are volatile but supported by limited supply.
    • Coal: Prices firmed 2.5% on rising LNG prices amid Middle East tensions.
    • Oil: +5.8%, spiked higher after Middle East tensions but has been easing.
    • Gold: After initially spiking on Middle East tensions, closed flat for the month US$3303 oz.
    • Copper: Drifted lower toward $3/lb.

7. Outlook

We have a moderately negative outlook on growth assets as tariffs are likely to impact US economic growth and corporate earnings. Consequently, we remain concerned about the relatively high valuations, particularly with US stocks. Markets do not appear to be pricing in the potential negative impact on stock valuations; consequently, we see better value elsewhere.

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 provide 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 in equities. 

Geopolitical risks remain, but markets so far have taken a somewhat blasé attitude toward these risks. We believe that some caution is warranted and is additional justification for remaining underweight growth assets.

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.