Saward Dawson > Wealth Advisory Wrap > Monthly View > May 2025
A look back at last month and an outlook for the months ahead
What we liked
- Australian Federal election resulting in a clear government mandate. This provides the scope to provide reform and policy to improve Australian’s standard of living and business productivity levels. Let’s hope they take the opportunity.
- US core inflation reached its lowest 12-month reading since March 2021 at 2.8% annualised. This is still above the 2% target but is trending in the right direction, providing some impetus for the US Federal Reserve to cut interest rates. The rates outlook is complicated by the roll-out of import tariffs in the US as they are expected to provide an inflationary impulse.
- Hiring in the US slowed in April but by a bit less than expected. US non-farm payrolls increased by 177,000 beating expectations for an increase of 130,000 jobs.
- Britain’s economy returned to growth in February with its fastest expansion in 11 months, beating economists’ expectations. British gross domestic product grew at a monthly pace of 0.5% in February, beating the consensus expected of 0.1%.
- China’s economy continued to show a modest pickup for the first two months of the year. Retail sales rose by 4.0% in the January-February period from a year ago. While Industrial production climbed 5.9% in the first two months of the year from a year ago.
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.
- Consumer confidence in the US continued to deteriorate in April, with the University of Michigan’s (UoM) Consumer Sentiment Index dropping to 50.8 in the flash estimate from 57 in March. This reading came in worse than the market expectation of 54.5.
- US Existing-home sales slipped 5.9% in March to a seasonally adjusted annual rate of 4.02 million. Sales slowed 2.4% from one year ago. Inventory of unsold houses jumped 8.1% also, showing that higher interest rates in the US are negatively impacting the housing market.
- U.S. job openings dropped sharply in March, but a decline in layoffs suggested that the labour market remained on solid footing. Job openings, a measure of labour demand, decreased 288,000 to 7.192 million by the last day of March.
Base Case
Our view of the most likely scenario for markets over the coming months, for which our portfolios are currently positioned.
78% Probability
A cautious view on global growth over the short-term prevails, as global economic data continues to come in mixed. This is being exacerbated by uncertainty surrounding import tariff policy emanating from the US. While international equity earnings have been satisfactory and, in some cases, better than expected and a 90-day pause on reciprocal tariffs has seen markets bounce, we expect volatility to remain higher than normal over coming months.
Our view remains that global inflation is expected to remain benign in the first half of 2025, although to remain above averages from the past decade. In isolation, this should remain supportive for credit markets as well as equities.
The recent announcement of tariffs by the US administration has increased the possibility of headwinds to the US and global economic growth base case, as outlined above. Fully implemented. tariffs with staying power, while not our base case, would likely see a deterioration in global growth expectations and impair equity prices. We continue to see tariffs as likely but their severity and duration subject to diplomatic negotiations between individual countries. The longer uncertainty persists, the more pronounced a negative impact on business activity is expected. Policy uncertainty emanating from the US also risks discounting asset valuations the longer it persists.
The current environment leaves central banks, particularly the U.S. Federal Reserve, in a difficult position. Developed economy central bank choices appear to be to ease financial conditions thus supporting the economy and financial system, while risking local currency weakness leading to higher bond yields and inflation or continue to fight inflation and risk more severe economic weakness and potential bond market/banking stress by tightening financial conditions and liquidity. The actions of policy makers to move in either direction will be a large driver of financial market performance over the coming months. We maintain an open-mind, with options to become more defensive available, as well as cash available to take advantage of any market valuation dislocations.
Global liquidity growth has recently picked up, providing some reassurance, but remains a key area to watch. This remains key to holding a constructive view on risk assets as we anticipate very high demand for new debt and debt rollovers over the remainder of 2025. So, while we remain constructive on economic activity and risk asset performance, in particular monetary inflation hedges such as precious metals, the risks to our base case rise should recent US tariff announcements be fully implemented and/or if large liquidity injections from the Peoples Bank of China or the US Federal Reserve are not forthcoming.
That said, we expect liquidity injections to continue to rise over the coming months. This is expected to provide continued support for financial markets over the medium-term. So, while short-term volatility may rise, we expect this addition of liquidity into the financial markets will be supportive of risk assets over the remainder of this year.
This scenario is likely to see us maintain a positive bias towards growth assets over the medium-term, albeit with the expectation that volatility is also expected to remain high.
Weakening in employment leading indicators, or if we see central banks reducing their efforts to provide liquidity into financial markets would lead to more defensive positioning, most likely expressed in higher cash holdings. Overall, asset allocation will retain a bias to growth assets with corporate earnings and global economic activity remaining positive, with short-term tactical positioning to be guided by macroeconomic developments, valuations and central bank actions.
Bear Case
Our worst-case scenario for the coming months, which we are prepared to position for should conditions deteriorate.
11% Probability
Global consumer demand for goods and services falls further than expected, with US economic growth showing signs of faltering and the rest of the world showing no sustainable signs of improvement from tepid recent growth. Tariff plans from the US are more severe and longer dated than markets currently expect, adding to inflationary pressures, placing the recent global general trend of interest rate cutting under pressure. This could lead to retaliation from US trading partners, with the effect being to further dampen global trade and economic activity.
Any reversion to bank stresses seen in March 2023 from volatile credit markets would be expected to further tighten bank lending standards also. This volatility could come about as government debt levels are challenged on their sustainability, leading the bond market to demand a higher yield premium. This could act to place pressure on the currently strong global employment conditions.
Geopolitical tensions could act to negatively impact supply chain bottle necks and energy prices, further exacerbating inflationary pressures and placing greater pressure on central banks to tighten monetary and financial conditions. Additionally, wage pressures and higher cost of lodging become more systemic as employees successfully lobby for wage increases. This will lead to a deterioration in company profits as increased input costs, and debt servicing costs (from higher interest rates) combined with lower demand converge to crimp company earnings.
Such a scenario would result in a tightening of financial conditions, while inflationary pressures remain elevated. This could see central banks continuing to withdraw monetary support (through higher interest rates) at a time when the economy is weakening. Additionally, an untimely withdrawal or reduction of central bank liquidity into the financial system could derail financial markets, which have become accustomed to liquidity support. When combined with reduced government expenditure, due to elevated indebtedness, this may cause consumer confidence and spending to fall, as prior government support is not fully replaced by gainful employment income.
With China’s property market remaining challenged, a potential debt/deflation spiral remains a risk. Should recent stimulus not act to support the property market and consumer confidence we could see high debt levels continue to place strain on economic growth. Such a scenario could also place further stress on the Australian economy as this would negatively impact demand for Australia’s largest export of natural resources.
Rapid escalation in geo-political tensions or a significant or systemic credit default, due to over-indebtedness in an environment of rising bond yields and elevated volatility in financial asset prices, could see a liquidation of risk assets within a compressed period. Such a situation would see us move rapidly and meaningfully into cash at the expense of equities. Further to this, the recent stresses seen in globally systemically important banks could lead to more bouts of liquidity events, which would be expected to have a pronounced negative effect on economic growth.
Above scenarios playing out will see us take a more aggressive defensive position and reduce equity exposures replacing them with defensive assets, such as cash. The accelerating bond yield scenario would require a more nuanced shift toward companies and sectors that would be the greatest beneficiaries of such a move. Focus will be on a more defensive posture with capital preservation being the primary objective. A further shift towards defensive sectors such as healthcare, consumer staples and utilities would combine with higher cash levels in this scenario.
Bull case
Our most optimistic view for markets over the coming months.
11% Probability
Economies across the developed world experience better than anticipated economic growth rates. When combined with benign and waning inflationary pressures, as supply chain and employment bottlenecks ease and productivity levels improve, we would expect a virtuous pro-growth asset environment as interest rate pressures subside. Additionally, current global conflicts remain mostly contained to their regions and trade tariffs are short-dated and watered down following diplomatic negotiations amongst the world’s largest trade partners.
In this scenario, inputs costs for corporates reduce resulting in resilient earnings growth for companies as economic growth accelerates and costs remain contained. Profit margins would be expected to remain strong and likely improve further.
Additionally, Donald Trump’s recent victory in the US could act to ignite “animal spirits” in the US economy, once current policy uncertainty is resolved. This increased confidence could lead to more spending from small business and consumers, combined these cohorts have a major impact on the US economy. Such a scenario could also lead to greater credit demand, further fuelling the economic impact.
In Australia, a general election could lead to strong fiscal spending. This would support economic growth and an improved environment for businesses.
Fiscal support from governments and central bank liquidity could combine with sound cash levels on household and corporate balance sheets to accelerate the speed of the global economic recovery. Additional support could also come from increased leverage on household and corporate balance sheets. In the event central banks resume measures aimed at suppressing interest rates below inflation levels and potentially adding further liquidity enhancement measures to support financial systems, we would expect this to further fuel asset prices.
This scenario would be positive for financial markets as loosening financial conditions act to fuel demand for growth assets in a low to negative real interest rate environment. We would act by ensuring a growth asset bias with low cash levels. Additionally, if leading economic indicators began surprising to the upside a net shift towards cyclical sectors leveraged to economic growth would occur.
Stock in Focus – Tencent Holdings Limited
Investment Thesis
- Attractive valuation – Tencent has been trading on a mid-teens price to earnings ratio when looking at next years earnings. This is a very attractive valuation for a company with a history of strong earnings growth and a record of high returns on invested capital. Among China’s Internet leaders, Tencent has historically merited a premium valuation for its strong revenue growth and earnings visibility.
- Margin growth story – AI deployment, combined with continuous AI ad tech upgrades, we expect will result in Tencent’s ad growth being more durable than global peers given leverage from its user data in mini programs and payments. Tencent has also not monetised the enormous user data set it has aggregated over time. With AI ad tech upgrade, Tencent is able to monetise existing data with no extra cost, other than chip procurement.
- Regulatory tailwinds – following years of regulatory headwinds to the tech sector in China, the Internet regulatory environment appears to be easing. This is expected to provide a tailwind following years of having to deal through a more challenging trading environment.
- Capital management– the company has recently stepped-up share buybacks. We expect this to provide share price support in what has been a volatile few months in equity markets.
History
Tencent Holdings Limited was formerly known as Tencent (BVI) Limited and changed its name to Tencent Holding Limited in February 2004. The company was founded in 1998 and is headquartered in Shenzhen, the People’s Republic of China. Today it has a market value of ~AUD$875Billion.
Tencent Holdings Limited, an investment holding company, offers value-added services (VAS), online advertising, fintech, and business services in the People’s Republic of China and internationally. It operates through VAS, Online Advertising, FinTech and Business Services, and Others segments. The company’s consumers business provides communication and services, such as instant messaging and social network; digital content including online games, videos, live streaming, news, music, and literature; fintech services, which includes mobile payment, wealth management, loans, and securities trading; and various tools, such as network security management, browser, navigation, application management, email, etc. Its enterprise business comprises marketing solutions, which offers digital tools including user insight, creative management, placement strategy, and digital assets management; and cloud services, such as cloud computing, big data analytics, artificial intelligence, Internet of Things, security and other technologies for financial services, education, healthcare, retail, industry, transport, energy, and radio & television applications. In addition, the company operates innovation business, which includes artificial intelligences, such as robotics, and quantum computing; and discover and develops enterprise and next-generation technologies for food production, energy creation, and water management application.
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.
