Saward Dawson > Wealth Advisory Wrap > Monthly View > June 2025
A look back at last month and an outlook for the months ahead
What we liked
- The RBA cut the official cash rate from 4.1% to 3.85% in May. This should be supportive of discretionary spending in the local economy and ultimately overall economic activity.
- US services ISM reading came in at 51.6, above the forecast of 50.2. This marks the tenth consecutive month of expansion for the index. A positive as the US economy is dominated by services and this continued expansion bodes well for economic activity growth within the US economy remaining positive.
- The Bank of England cut its base rate to 4.25%, from 4.5%. The cut was expected, but the Bank’s nine-person Monetary Policy Committee was divided, indicating the path down in interest rates is unlikely to be guaranteed.
- The ZEW Indicator of Economic Sentiment for Germany rebounded significantly in May following a sharp decline in April 2025, rising to 25.2 points—an increase of 39.2 points from the previous month—placing it firmly in positive range. A tentative harbinger of improved economic activity to be expected from Europe’s manufacturing powerhouse.
- China continues its piecemeal stimulus with the People’s Bank of China trimming the 1-year loan prime rate to 3.0% from 3.1%, and the 5-year LPR to 3.5% from 3.6%. while we see it is as a positive, we expect to see more stimulus from China, once tariff uncertainty eases.
What we didn’t
- Continued policy uncertainty regarding the imposition of trade tariffs. This is negatively impacting consumer and business sentiment, which is leading to apprehension on consumer and capital spending.
- US building permits dropped to a seasonally adjusted annual rate of 1.412 million in April, the lowest level in almost a year. This marks a 4.7% decrease from March and a 3.2% decline compared to one year ago. This exhibits the negative impact on housing from the continued high level of mortgage rates in the US.
- Retail sales in the Eurozone fell by 0.1% in March. While not considered a very negative read, it does highlight the challenges the Eurozone has had in rekindling domestic economic growth and consumer demand over the past year.
- Inflation rates in the UK jumped by more than expected in April to 3.5% annualised, its highest rate in a year, and above the expected rise of 3.3%. This will temper the ability of the Bank of England to continue to cut interest rates.
- Japan’s economy shrank for the first time in a year, contracting 0.2% in the March quarter as exports declined sharply. Japan’s GDP data comes at a time when the country is locked in trade negotiations with the U.S., with initial talks between both sides so far not yielding a conclusive deal.
Base Case
Our view of the most likely scenario for markets over the coming months, for which our portfolios are currently positioned.
76% Probability
A cautious stance on global growth persists in the short term, as economic data across regions remains mixed. This uncertainty is being amplified by ambiguous U.S. tariff policies. While corporate earnings from international equities have generally met or exceeded expectations—and markets have responded positively to the temporary 90-day pause in reciprocal tariffs—we anticipate sustained volatility in the months ahead.
We continue to expect global inflation to remain benign through the first half of 2025, albeit above the average levels seen over the past decade. This environment, in isolation, is likely to remain supportive for both credit markets and equities.
However, the U.S. administration’s recent tariff announcements have introduced additional downside risks to our base case. Conversely, the proposed “big, beautiful bill” appears more stimulatory than initially forecast, especially when considered alongside ongoing deregulation efforts in the U.S. Taken together, these developments support a constructive medium-term outlook for economic activity, though they do imply persistently elevated government deficit risks.
Central banks, particularly the U.S. Federal Reserve, now face a difficult balancing act. Policymakers in developed economies must choose between easing financial conditions—to support growth and system stability—while risking currency depreciation and higher yields, or continuing to tighten monetary policy to combat inflation, with the attendant risks of economic contraction and stress in the bond and banking sectors. The direction central banks take will be a critical driver of market performance in the coming months.
We remain flexible in our positioning, with the capacity to shift defensively if needed and sufficient cash reserves to capitalise on market dislocations.
Recent global liquidity growth offers some reassurance, though the pace has been uneven and remains a key variable in maintaining a constructive view on risk assets. With strong demand expected for both new and rollover debt through the remainder of 2025, continued liquidity support is essential. Accordingly, while we remain constructive on global economic activity and risk asset performance—particularly inflation hedges like precious metals—the risks to our base case would increase significantly should the U.S. tariffs be fully enacted or if substantial liquidity injections from the People’s Bank of China or the U.S. Federal Reserve fail to materialise.
Nonetheless, we anticipate further liquidity injections over the coming months, which should lend medium-term support to financial markets. While short-term volatility is likely to persist, we believe this liquidity environment will be broadly supportive of risk assets through year-end.
This backdrop supports maintaining a positive medium-term bias toward growth assets, albeit with the expectation of continued elevated volatility. A weakening in employment indicators or a retrenchment in central bank liquidity support would trigger a more defensive posture, likely characterised by higher cash allocations. Overall, our asset allocation will retain a pro-growth tilt, underpinned by constructive views on corporate earnings and global economic activity, while tactical decisions will be guided by macroeconomic developments, valuations, and central bank policy.
Bear Case
Our worst-case scenario for the coming months, which we are prepared to position for should conditions deteriorate.
11% Probability
In this scenario, global consumer demand declines more sharply than anticipated, with the U.S. economy showing signs of weakening and little evidence of meaningful recovery elsewhere. Should U.S. tariff plans prove to be more aggressive and enduring than currently expected, inflationary pressures could rise, potentially reversing the recent global trend toward interest rate cuts. Such a development may provoke retaliatory trade measures, further suppressing global trade and economic growth.
A return of the banking sector stresses observed in March 2023, driven by credit market volatility, could tighten lending standards further. Rising concerns over sovereign debt sustainability may prompt bond markets to demand higher yield premiums, exacerbating financial stress. Any stall or decline in global liquidity growth would compound these pressures, potentially weakening currently robust employment conditions.
Geopolitical instability may disrupt supply chains and energy markets, intensifying inflationary pressures and forcing central banks to maintain tight monetary policies. Simultaneously, rising wage demands and housing costs may become embedded, further pressuring corporate margins as input and debt servicing costs rise amid softening demand.
This confluence of tightening financial conditions and elevated inflation could compel central banks to maintain or increase interest rates even as economic activity deteriorates. A premature withdrawal of central bank liquidity could destabilise financial markets, which have come to rely heavily on such support. Coupled with constrained government spending due to elevated debt levels, this would likely erode consumer confidence and spending, especially in the absence of strong wage growth.
In China, continued fragility in the property sector raises the risk of a deflationary debt spiral. If recent stimulus measures fail to support consumer confidence and property prices, high debt burdens may continue to suppress growth. Such a scenario would have negative implications for Australia, given its reliance on natural resource exports to China.
A sudden escalation in geopolitical tensions or a major credit event stemming from excessive leverage in a rising yield environment could trigger a rapid and widespread sell-off in risk assets. In this case, we would move decisively into defensive positioning, prioritising capital preservation through elevated cash holdings and reduced equity exposure. Renewed stress in systemically important global banks could also trigger liquidity events with materially negative effects on global growth.
Should these risks materialise, we would adopt a more defensive strategy, rotating away from equities and into cash and defensive sectors. In a scenario of rapidly rising bond yields, a more selective approach would be required, focusing on companies and industries best positioned to benefit from such a shift. Defensive allocations would likely include increased exposure to healthcare, consumer staples, and utilities, alongside elevated cash reserves.
Bull case
Our most optimistic view for markets over the coming months.
13% Probability
In a more optimistic scenario, developed economies exceed growth expectations as policy clarity improves. Easing supply chain constraints, better labor market dynamics, and rising productivity contribute to subdued and declining inflationary pressures. Diplomatic progress leads to shorter and less impactful trade tariffs, while regional geopolitical conflicts remain contained.
Lower input costs, combined with strengthening demand, would drive resilient and possibly accelerating corporate earnings growth. Profit margins could remain elevated or improve further.
A pivot away from fiscal austerity—characterised by increased government spending—could catalyse a faster economic expansion. While this may reintroduce some inflationary risk, we believe nominal growth would likely outpace inflation, creating a favorable environment for risk assets.
In Australia, sustained government spending is expected to support domestic growth. Globally, coordinated stimulus measures—including recent actions by China and Europe—paired with healthy household and corporate balance sheets could significantly accelerate recovery. Increased leverage, if managed prudently, could further amplify this trend.
Should central banks resume efforts to keep interest rates below inflation and enhance liquidity support, financial markets could see a renewed uptrend. Such conditions would likely stimulate further demand for growth assets in a low or negative real rate environment.
In this scenario, we would maintain a growth-oriented asset allocation with minimal cash holdings. Should leading indicators begin to surprise positively, we would likely shift further toward cyclical sectors that are more leveraged to economic growth.
Stock in Focus – Harvey Norman Holdings Ltd
Investment Thesis
Key reasons for the increase:
- Harvey Norman reported better than expected first half results in February 2025. With the portfolio underweight Consumer Discretionary stocks and not wanting to overpay for some of the more expensive names, HVN is one we have been keeping an eye on. The stock rallied strongly to a 3 year high on the result but like most stocks took a hit over the March/April period back to prices it was trading on before the result. HVN generates higher margins, has a higher earnings growth rate in the forward estimates, and a pays a higher dividend yield than its major peer, yet trades at a significant multiple discount. It also boasts Australia’s largest retail property portfolio at $4 billion equal to around 2/3rds of the company’s market capitalisation providing a high level of asset backing.
- Growth and Income – HVN looks attractive on both a growth and income basis on a 1 – 3 year investment horizon. This view is underpinned by interest rates expected to fall, housing supply expected to get a boost with the housing shortage becoming a flash point during the recent election, a desktop and laptop computer upgrade cycle underway due to AI compatibility requirements, and HVN trading on a reasonable multiple and a forecast 6.70% gross dividend yield.
History
Harvey Norman Holdings Limited engages in the integrated retail, franchise, property, and digital system businesses. The company was founded in 1982 and is headquartered in Homebush West, Australia. Today it has a market capitalization of ~AUD$6.5 Billion.
It franchises and sells products in various categories, including electrical goods, furniture, computerized communications, bedding and Manchester, kitchen and small appliances, bathroom and tiles, and carpets and floorings. It operates complexes under the Harvey Norman, Domayne, and Joyce Mayne brands. It is also involved in the property investment and media placement activities; acts as a lessor of premises to Harvey Norman, Domayne, and Joyce Mayne franchisees and other third parties, as well as retail properties; development and sale of properties; and provision of consumer finance and other commercial loans and advances.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.
Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.
