


Kickstarting 2025, Tim Rocks is joined by Gerard Minack from Minack Advisors to unpack the uncertainty surrounding global markets, particularly in the US following Trump’s inauguration. While the outlook is complex, one thing is clear — we are in for a big year ahead.
Introduction
Welcome to Words on Wealth, a podcast by Evans and Partners that unpacks the key trends and opportunities shaping markets, the economy and your financial well-being. Join us as we make sense of the issues that matter most to you.
Tim Rocks
Hello, and welcome to words on wealth, our first episode for 2025. And we thought it good to start with an overview of what might happen this year. And it’s been an eventful few weeks, of course, with all focus on the US and some of the political developments here, but to guide us through that. I have with us one of our regular contributors, Gerard Minack from Minack Advisors, and we’re grateful again for your time, Gerard, so thanks a lot.
Gerard Minack
You’re welcome, Tim. Happy New Year. It’s going to be big year, I think.
Tim Rocks
Yeah, well, very interested to hear what you’re going to say about some of these things, but to be honest, sort of starting this year, I’ve got even some less ideas than I normally have about how the year’s going to pan out. But why don’t we start just with those big picture issues? know, what do you think are going to be the big debates we’re going to be having in 2025? And then we might drill into some of those. But yeah, so what should we be thinking about?
Gerard Minack
Well, let me start off by just echoing what you just alluded to. I mean, I also have less conviction on what may happen this year compared to what I would normally have. And that’s because everywhere you look, you have a high degree of policy risk, not just the incoming Trump administration, but frankly, almost every G7 leader is going to change or will change shortly aside from Italy, very likely to have a new administration in Germany after their upcoming elections. And we’ve also got huge political uncertainty around what’s happening in China. And sad to say, I have no edge on what Mr. Xi or Mr. Trump or any other leaders may do, we’re just gonna have to respond. the first point to make there for is lower than usual conviction. But let’s perhaps start off by talking about what I think I do know. We’re coming into this year after what was a very uneven global growth year in 2024. The US surprised to the high side, but most other economies disappointed. China technically did not, but we don’t really trust a lot of Chinese data. Most of the real data that we can trust suggested it also had a disappointing year. This year, many investors are expecting a same dichotomy between US strength and tepid, if not outright weakness, now, I actually think that provides a little bit of upside risk, notwithstanding all the policy risks. You would imagine that at some stage there will be a reasonable Chinese stimulus package. You would imagine in Europe, particularly after the German elections, that they may become less restrictive on fiscal policy and remove the so-called debt break. And the other thing that may boost growth in other developed economies is that almost everywhere you look, including Australia for what it’s worth, we have had actually quite tight labour markets, notwithstanding some tepid GDP growth outcomes. And wage growth is running at very respectable levels. Even in a place like Japan, wage growth is running near 4%, which is the strongest we’ve seen in three decades. Now that positive wage growth a year ago still wasn’t keeping pace with inflation. So, in real terms, wages were falling a year ago. But as inflation has fallen globally over the last 12 months and nominal wage growth has stayed at quite respectable levels, we’ve seen a really big turnaround in real or inflation adjusted wage growth. And that makes me think that there is the potential for upside surprise in terms of consumer spending in Japan, in Europe, even potentially here in Australia. So, the first point that I think I know is that although last year was a macro disappointment for almost every economy outside the US, I think this year the growth gap will narrow. And the way it could narrow is that we get better growth coming out of places like Europe and Japan. So that’s the first bit of good news. The sting in the tail for that, however, comes to interest rates because, well, last year, as recently as September, investors were expecting that most developed economy central banks would be cutting rates quite aggressively in 2025. Now let’s focus here on the US because… not just in an equity sense, also in a rate sense, it sets the tone for most markets. As recently as September last year, short rate markets were expecting that the Fed was gonna cut the Fed fund rate, their policy rate to below 3%. Now, they’re expecting the Fed won’t even cut to 4%. And that adjustment upward in what is effectively the cycle low point for rates, has also pushed up 10 year treasury yields in the US. And that backed up by almost a full percentage point since the September low and they’re now around four and a half to 5%. Now that’s creating potentially a bit of a headwind for risky assets such as equities. But the key message here is that we probably not gonna see central banks cutting rates as aggressively as was expected even three months ago. That adjustment has led to a broad based increase in treasury yields around developed economies led by the US, but we’ve seen big increases in places like the UK and even ironically in Australia where I actually think the market may be underestimating how far the RBA can cut, but that’s a separate story. So, that’s all putting some pressure, let’s move to the third thing, that’s all putting some pressure on equity market pricing. Now, there was the so-called Trump trade, markets did bounce after Mr. Trump’s election. But I’m turning a little cautious on equities for this year. I don’t see a major bear market coming that would normally require a recession. And as I’ve already discussed, I think in terms of growth outcomes, the risks are to the upside, not the downside. But specific to the US market, I can see three potential risk factors that could lead to a correction. The first is US equities already look very expensive. They look very expensive every which way you want to cut it. They look very expensive in absolute terms relative to their own history. They look very expensive relative to other equity markets. In fact, if you look at the relative valuation of US equities to other developed markets, and I have data on that back to the late 80s, US equities have never looked as expensive as they do today. And they also look expensive relative to other asset classes like treasuries. Now, not quite as expensive as the all time hysterical peak, which was 2000. But aside from that, you’ve never seen US equities looking as expensive as they do now relative to treasuries. And every step up in treasury yields is exacerbating that appearance of excess valuation. So that’s the first problem, I think, potentially, for US equities, that valuations are looking very stretched and they will look even more stretched if treasury yields continue to rise. A second potential risk is the incoming Trump administration. Now –
Tim Rocks
I was wondering how long it was before we mentioned the word Trump.
Gerard Minack
That’s right. Well, we’ve gone a fair way into the podcast. So now, as I’ve already mentioned, I have no particular edge on what Mr. Trump will do in the discussions I’ve had with clients since he was elected. It’s almost like their reaction. It’s a little like showing them a Rorschach test. I’ve shown them the Trump inkblot and what they have seen says at least as much about them as about Mr. Trump. My more bullish clients are focused on the prospect of deregulation and tax cuts and budget restraint. My more bearish clients are focused on the prospect for tariffs, trade wars and migrant evictions. My concern is that Mr. Trump may try and do a little bit of everything, but it will be easier for him to do the bad stuff first. Cracking down on migrants or even having migrant evictions or introducing tariffs, all these things can be accomplished via executive orders, which literally Mr. Trump can do at the stroke of a pen. Fiscal restraint, property regulation, tax reform, all that requires legislation and that takes time. And indeed, although the Republicans appear to have control of every arm of US government. I mean, the SCOTUS, the POTUS, the House of Reps and the Senate. The fact is their majorities in Congress are very tight. The Republicans, as we saw in the last Congress, are not a particularly well-disciplined group. So, we can’t assume that a lot of the tax and deregulatory changes that Mr. Trump may want to get through Congress are going to sail through. There may be some arm twisting. So, I think the second risk for equities is simply that in terms of sequencing, we get bad Trump before we get good Trump. The third and final risk is around the artificial intelligence, AI thematic. Now, this was clearly a big driver of US equity gains through last year, and it’s been a big driver for US equity outperformance over the last two years. Now, I should stress, I’m not, my skill set is not analyzing individual stocks. But when I talk to clients, quite a few of them have suggested to me that this is going to be the “show me the money” year for the AI trade. We all know that corporate America is pouring enormous amounts of capex into this thematic. If you just look at the Magnificent 7, their investment spending over the year to September is US $270 billion. I mean, that’s not quite half a trillion Aussie dollars, but it’s not far short. If they to achieve their normal return on invested capital, which is 20 to 30%, that enormous investment spending should translate into earnings growth of around about $100 billion. Now, look, to be honest, I don’t have a strong view on how AI may change the world and change corporate profitability on a five-year time horizon. But I’m skeptical that they may be able to deliver the high expectations for returns that investors seem to have on a two or three quarter view. So, I view this as a potential risk that in the near term, least, expectations are too high for the AI boom to deliver on. And that leads to a correction. So, boiling it all down, and in a sense, trying to put not too much weight on our uncertainties around Mr. given how expensive US equities are, I’m starting the year cautious and I think there’s a real chance of a correction. So 10 to 20 % sell off in the first half of this year.
Tim Rocks
Yeah. Okay. All right. Now, one of the big debates is around the potential resurgence of US inflation. Part of that clearly depends on whether how much Trump delivers in terms of maybe immigration, but mostly on our side. Do you have a view on, know, what are your thoughts on that? Do you think it’s a real risk?
Gerard Minack
Short answer is yes. And I would focus on actually both parts, both the tariffs and the migration. It’s worth noting that in his first term, when Mr. Trump didn’t achieve the mass evictions that he’s promising this time, even then, we saw some economic consequences from his unfriendly attitude to particularly low skilled migrants. And the best evidence for him having an impact is if you look at the pay of unskilled workers, that lifted dramatically, lifted dramatically relative to average pay rates. In other words, if you reduce the supply of low skilled labor to the American economy, you very quickly get a wage response and their wages go up, which at the margin, at every fast food shop, at every construction site, every agricultural venture, that will push up their costs. And Mr. Trump is taking over an economy now in 2025 that has far less slack than the economy took over in 2017. And of course, in 2017, that was ending a long period where inflation had run typically below the Fed’s target. Today, we still have inflation that is sitting above the Fed’s target. The Fed seems confident that it will return to target through the course of this year, but it would not take much by the way of wages appearing to tick up that would make the Fed very concerned that we’re not going to get inflation back to target.
Tim Rocks
Yeah, I agree with that point. You see, obviously, some people are getting quite optimistic on what Trump does, but there’s limited scope for the economy to be much stronger because you are operating at full capacity. So therefore, the Fed would have to act pretty quickly on any evidence of an economy that accelerates too much from here.
Gerard Minack
Correct. And it also comes back to, I guess, the sequencing point that we talked about before. Most economists would assume that if you lift tariffs, the price impact is almost instantaneous. The last Trump administration showed that if you restrict labor supply, the wage response is fairly fast. Not instantaneous, but yeah, it’s apparent within two or three quarters. On the other hand, if you want to take structural change, deregulation, that may be beneficial over the medium term, but the impact is not instantaneous. In other words, I don’t think it’s realistic to expect that if Mr. Trump does measures that at the margin will add to inflation, he can very quickly offset that by tax cuts or deregulation that may provide an inflation dampening impact. So, this is all hugely significant for a Fed that has got its fingers crossed it’s to live in on some Fed rate cuts in anticipation of inflation returning to target. But it’s, you know, the story of the last few months has been that inflation has been slower to return to target that many were expecting. And that’s of course been part of the reason that rate markets reassessed how far the Fed would cut in 2025. And that in turn was part of the reason that treasury yields have backed up a full percent over the last four months.
Tim Rocks
Now, I also wanted to ask you about what’s gone on with the currencies, the US dollar in particular. The big asset classes seem to me have behaved in different ways. Equity market is cheering Trump, bond markets are fearing Trump, and currency movements have been pretty extreme. Any comments on the currency in particular? obviously that’s flowed through the Aussie dollar pretty extremely as well.
Gerard Minack
Yes. Look, everything that could go right for the US dollar in a sense did go right over last year, culminating with Mr. Trump’s election. So think of the things that usually affect the currency. Starting big picture, terms of trade, the ratio of export prices to import prices. America’s terms of trade are near all time highs. If you look at interest rate differentials, well, yes, the Fed did cut last year, but people have reassessed how far the federal cut this year, so that’s beneficial. In terms of GDP growth rate differentials, as already mentioned at the start, last year was a story of macro disappointment globally, aside from the US. So the growth gap between the US and the rest of the world went to the US dollars advantage. And the other indicator I look at is earnings growth. And there are also earnings growth in the US, surprise to the upside and was far superior to earnings growth outside the US. So we saw this real rally. And then what happened after Mr. Trump was elected? Well, there’s a fairly simple piece of economic theory, which says that if a country imposes tariffs, what tends to happen is that country’s currency goes up to partly neutralize the impact of those tariffs. So when Mr. Trump came in, the tariff ban, that produced the final leg up in the greenback. Looking into this year, I’m not going to try and spin a big bearish story for the US dollar, but I think several of those supports will moderate through this year. But the big uncertainty is the tariff, and that is crucial. So if I put the tariff to one side, I would say to you, look, it’s quite likely that the growth gap will narrow. I think the earnings gap will narrow. And even the terms of trade may come off a little. All that would point to the US greenback giving up at least part of the gains that it enjoyed through the course of calendar 24. But you know what, this is a very good example where the Trump uncertainty actually is almost dominant. If Mr. Trump comes out and does indulge in broad-based tariff increases, then we could see another leg up in the dollar. But let’s see, that’s all up in the air. And of course, if there were broad based US tariffs by themselves, that would be dollar positive. If there’s retaliatory tariffs from America’s trade partners, that all allows equal would tend to weaken the dollar. But it would also be bad for global growth. I mean, if we really do get into a tariff, tit for tat, tariff war, that would be bearish for growth. It would be bearish for equities. It would not be a good outcome for investors.
Tim Rocks
All right. Just wanted to finish with some quick observations on Australia. It feels like the economy is kind of limping along. I’d always thought there’s potential for consumer to pick up at some point. It doesn’t seem to have happened yet. Any thoughts on whether the economy is better in 2025 and what that might mean for RBA?
Gerard Minack
Yeah. Tim, I have good news for you and bad news. I think in a cyclical sense we will see some improvement and that’s partly because where we got to by the second half of last year was in a way such a bad position every which way was up and just to remind listeners, over the year to the June quarter last year, Australian households were experiencing the sharpest fall in real disposable income that we have ever seen, including in prior recessions. And that’s because we had all taken a triple whammy. We’d faced big price increases, we’d faced rate increases, and we faced tax increases because people forget that the stage one tax cuts had expired the year before. The good news going forward from a cyclical perspective is all three of those things should reverse. Inflation is falling. From the 1st of July, we had tax cuts. And I anticipate that we will get some RBA rate cuts. So on cyclical basis, this should be some sort of pickup, as I said, from what was a weak situation. It wasn’t a recession, but the private sector was doing so poorly, that we really were on government life support. And let me give you two stats regarding that. Firstly, over the year to September, all of your GDP growth was accounted for by government spending. In other words, over the year to September, there was zero private sector growth. And there was an analogous situation in the labour market. We continued to generate jobs, but three quarters of the jobs were either directly in government areas or government funded areas. So, both in an economic activity sense and a labor market sense, there was virtual private stagnation over the year to September. So we’re going to pick up. This year will be better than that, but, gee, 2024 is a low bar to exceed. The bad news is that I think we remain on the structural slow lane that we’ve really been in for the last decade. And we’ve had poor productivity growth for a decade, we’ve had significantly slower income growth over the last 10 years than what we enjoyed for the 10 or 15 years before that. So, although cyclically we’re going to have an improvement, I think structurally we’re still in a slow growth mode, which means that we will continue to see only anemic real wage increases and outside of population driven GDP growth, anemic per capita GDP growth. Now, all that it means to me is, unlike in America, where I think we have an environment of structurally higher rates, I’m not sure that we have structurally higher rates here in Australia. So I actually think that rate markets here may be underestimating how far the RBA can cut. Not necessarily this year, but certainly if we’re looking at 2025. I think the RBA can cut a bit more than what rate markets are pricing, which should obviously provide some support for things like residential construction and possibly a little bit of support for business investment, but there are other problems there.
Tim Rocks
combined that then with a expensive equity market. It doesn’t feel like the Aussie economy and Aussie market is going to excite people too much then this year.
Gerard Minack
That’s a great way to characterize it. When I talk to clients overseas, I just say, look, I think this is an unexciting market. We look quite expensive if you compare Australian equities to the earnings expected. Now in America, their market is a little more expensive than ours on just a straight PE basis. The consensus expects near 15 % EPS growth, over the next 12 months for US corporates. Here in Australia, consensus expects something like 2 or 3 % growth. So you’re paying a lot for a slow growth market. that means I think if we did see correction in the US, we’re not going to be immune. We’ve got no protective valuation buffer. And so I’m also cautious on Aussie equities. So, it’s unexciting. And what keeps my enthusiasm in check is that I think we have a relatively expensive market considering how poor our earnings growth is expected to be and how poor for now our trend domestic growth seems to be. So the structural headwinds are going to keep equity returns in check here, I think.
Tim Rocks
All right, Gerard, we should leave it there. Thank you very much for your insights. I think we’ll have to call on you more often than normal just to see how the year evolves and once things settle down, particularly on the policy front. But as always, really appreciate your insights.
Gerard Minack
Yeah, great to catch up. And yes, I think for people like you and I, Tim, macro people, it could be a very big year. Great. All right. Thanks, Gerard. Thanks all, talk to you next time.
Disclaimer
This podcast was prepared by Evans and Partners Proprietary Limited AFSL number 318075. Any advice is general advice only and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Where this presentation refers to a particular financial product, you should obtain a copy of the relevant PDS, TMD or offer document before making any investment decisions. Past investment performance is not a reliable indicator of future investment performance. Directors, employees and officers at Evans & Partners and its related entities may have holdings in securities listed. Any taxation information is general and should only be used as a guide.
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Disclaimer
This podcast was prepared by Evans and Partners Pty Limited AFSL 318075.
Any advice is general advice only and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Where this presentation refers to a particular financial product, you should obtain a copy of the relevant PDS, TMD or offer document before making any investment decisions. Past performance is not a reliable indicator of future performance.
Directors, employees and officers of Evans and Partners and its related bodies corporate may have holdings in the securities discussed. Any taxation information is general and should only be used as a guide.
This communication is not intended to be a research report (as defined in ASIC Regulatory Guides 79 and 264). Any express or implicit opinion or recommendation about a named or readily identifiable investment product is merely a restatement, summary or extract of another research report that has already been broadly distributed.