Paul Taylor
Well, hello, everyone, and welcome to Fidelity Sound Bites. My name is Taylor, Paul Taylor, and I'm Head of Investments here in Australia. With me today, we have the dream team. We have James Abela, who's the portfolio manager for the Australian and Global Future Leaders Fund, as well as Casey McLean, the portfolio manager for the Australian High Conviction Fund. And our topic here at the end of the year is the Outlook for 2025.
But before we get into all the really interesting stuff about 2025, I did wanna talk about one little competition we're running at the end of the year. Now, we're all very excited here today because it's our Christmas party. It's the Fidelity Christmas Party. And Now we have a theme for the Christmas party and that theme is iconic movie characters and you'll see from the photo that covers the podcast that we're all dressed up. And if you can correctly identify the character each of us is playing and send that prediction in and get it correct, the first correct entry will pick up will win $100 Westfield voucher. Please email your answers to podcastsaustralia@fil.com.
Good luck with that. Hopefully it should be pretty easy.
Paul Taylor
Hi guys, great to be here, welcome. Before we get into things, do you wanna give a hint as to who your character is?
James Abela
Alright here we go, summer rally it happens so fast I met a stock crazy for me problem was, was on a 50PE.
Casey McLean
Yeah, hi guys, great to be here with Wolfpack.
PT
Yes, okay, so a couple of good hints there, hopefully with my introduction as well, you've got a pretty good idea of exactly who we are.
Now let's have a little look back at your predictions, all of our predictions for last year.d. I was surprised how good we were. So I predicted the Broncos would win the Premiership, the Brisbane Lions would win the flag and the Brisbane female Lions would also win. Obviously the Broncos I didn't get, unfortunately, but the Brisbane Lions, we got both. So I was pretty happy with that, that was a good result. How did you think you went, James?
JA
I said that inflation would come down and it had come down very quickly actually. We're up at sevens and eights back then and now it's around the three levels. So it did actually happen and it's always hard when you're at like very strong inflation levels, people feel like it's gonna go on forever. But it did happen and we could see leads I guess from the US and Europe that it was coming down. So you're happy that one has come off. So, Casey?
CL
Yeah, well, I luckily took the other side of Paul's trade and said New South Wales would win the state of origin, so quite successful there. And the other one was that there would be a few surprises in the elections that were held last year, where I think that one came off as well. We saw big swings away from all the incumbents right around the world, so.
PT
Well, you do seem to like to take the other side of my trades as well. I'm not quite sure what that's about but anyway.
So review of '24. So tech continued its great rally. Banks hit new heights. Cost of living didn't, you know, it's there and it's impacting the consumer in different parts of society but overall actually the consumer still sort of hung in there pretty well. So that was that was an interesting outcome for '24.
There's a little I would also say as we went through the year, we maybe normalisation of markets, if I can put it that way, we have been very macro driven last couple of years, '22, '23 very macro driven as interest rates went up, then we saw a bit of sort of normalisation and hope and you know, I guess well, at least my view going forward is we're going to be much more stock specific We have started to be that through '24, but it's going to definitely come into '25 Did you see you guys see any major differences in 24?
CL
Well, no, I think that's that's right I mean we had some pretty violent bouts of volatility along the way though. I remember back in August, the Japanese carry trade unwind, which was, which was, you know, a pretty violent incident. And, you know, some thought, you know, the end of the bull market, which didn't sort of pan out.
PT
But it just disappeared. As quick as it arrived.
CL
Yeah. Yeah. And, but I think that's an ongoing thing. Volatility is here to stay. There's more uncertainty in the global macro environment. And, and that's not something that's going away anyway, so.
JA
You know, I'd say, look, tech, tech was a big thing in small caps. It was just the dominant theme of the year. We had tech, tech software, we had health tech, we had consumer tech, and tech just dominated all the high performers have all been really technology. And the index is up, you know, quite significantly during the year, up 22 % for the year to November. But yeah, tech health care and financials all did incredibly well. So it was definitely like it's a very macro driven from the fear of free money going back a few years to money so expensive we're going to get nowhere to now it's normalized. But it's very, it's very euphoric in mid caps and small caps.
PT
So you just need to put tech behind your name. Is that what you're saying?
JA
Pretty much [laughter]
PT
So we know we need is like a resources tech and that we could get the could get the resources going as well. It reminds me of the TMT bubble when every company renamed themselves .com and got a massive valuation uplift on the back of that. Now, if we look a little bit forward as well, in Australia, the big one is always sort of banks, financials against resources. And what we, I guess what we saw in '24 was really the banks and financials in general performed strongly and resources is still very much the forgotten about sector, cheap sector seems to be very related to, you know, a negative focus on China and, you know, China's impact on resources. But I guess I'd like, maybe let's just open up. And , James, in the small cap world, it's a little bit different for you. But maybe I might start with Casey. But you can still give your view on resources as well.
Casey, as we go into '25, how do you see banks' financials against the resources?
CL
Yeah, I think with not only the banks and resources, but I think across the market with this sort of ongoing volatility and also a bit of a change in the macro regime to global interest rate cutting regime, that's often a trigger for rotation amongst sectors. Leadership in the market can change, and I think banks are pretty ripe for that given my view is that the fundamentals are really disconnected from valuations there. You can see returns are in structural decline for the banks. Mortgage returns are in line with the cost of capital, yet competition is still increasing. Business banking gets you better returns, but that's also a new source of competition. And then if we do have interest rate cuts, that's another sort of headwind for bank earnings. And yet, they're trading on record high multiples, whether you look at absolute terms or relative to the market. And so I don't think the risk reward looks great for the banks. And I guess one way to sort of telegraph that is if you compare CBA versus CSL: both stocks happen to be trading on about 26 times PE for FY25. For CBA, that's about 75 % above its long -term average. For CSL, it's bang in line with their average, But the growth rates and returns are very different. For CBA the market's looking for about 2 % growth over the next couple of years, at a 13% ROE. But CSL, the market's looking for 15 % growth, high-teens growth, over the next couple of years and an 18 % ROE. So I think that shows you the big disconnect between the fundamentals and valuations in the banks.
PT
That's really interesting on the banks and like I said, resources is probably the cheapest sector, but it doesn't feel like, you know, what's the catalyst to get it going?
CL
Yeah. No, I think that's right. And, you know, if you look historically, it's rarely been a time where banks and resources have both outperformed in the Australian market. But I think there is some potential catalysts down the track for the resources sector. I mean, China's policy pivot over the last few months is pretty meaningful. They've executed on the monetary policy side, the fiscal policy side that they still haven't fired those bullets yet, but I think they are in the barrel, they're ready to go. They're just waiting for Trump to come in and see how bad the tariffs are there. And I think the market's reaction to that in the resources sectors, probably the initial reaction when tariffs are imposed is, that's bad for resources. It's bad for global trade, bad for growth and resources sell off. But the secondary reaction that could be is that China will stimulate to offset these tariffs, which is good for commodities. So I think with that and I think it's a structural change in China's policy stance, the risk-reward looks much better to me in resources than it does in the banks.
PT
Okay, well that sounds more positive for '25. James, do you have your view on resources for 25?
JA
Yeah, so just looking back, the index, the INDEX, was up 44 % for the year in small caps compared to the index at 22. So a huge performance and that's really driven by the confidence like similar to I guess to Casey's comments about the banks, financials confidence as a sector was very high, as we're going from recession to euphoria. The attitude towards risk had changed, so those multiples really expanded. But Netwealth and Hub (Hub 24) multiples expanded enormously and the structural growth in those businesses are still very very strong. So it's you know 15, 25 % growth for these sort of names over the next few years and they've delivered that over the past. But resources is the opposite. Yes, you know, very much a bear market except for gold and copper is still, is quite bullish. But resources did quite poorly is, you know, one of the worst performing sectors only up 7 % for the year. But that's really driven by gold and copper, everything else not doing a lot. So I'm definitely looking at that. I've been, you know, looking at buying strong free cash flow yields that are very attractive regulations and resources. For example a little bit of iron ore and other things. But it is very attractive and sentiment is very poor. So it is a very good opportunity, and I've seen this before in small caps - late 2016, resources and energy the market was very underweight those sectors, it was very much a bear market and those indexes went up nearly 100 % in the 12 months after that, late 2016. So they can have a rally, usually based on stimulus or some kind of greater confidence in the universe, but they can move a lot, resources and energy names, if there is that commodity confidence come through.
PT
Yeah, it's almost like a pinch point, isn't it really? When that pinch point happens, they just think they can really move.
JA
And you're starting to see obviously large caps with Anglo, takeovers in small caps with De Grey. So you're getting the industry saying, "Okay, there's valuation here" and that's the way it is.
CL
And you even had Rio taking over Arcadian
JA
Exactly. Yeah. So it's all starting. You've got gold. You've got Rio. So I think like it's a good signal that the industry sees value. So it's a good signal for that one.
PT
Yeah and I think once the industry sees, and I agree. I mean, I think resources are looking really good value at the moment, it's hard to see that. And maybe M&A is the catalyst.
JA
Yeah, it can be.
PT
It can be China, it can be an M&A. The one thing I'd pull out on financials though as well is I actually still think insurance looks pretty good for '25. I think premiums are strong, they've got they've got strong cash flow they're actually paying out good dividends, there's gonna be a lot of capital returns I think pretty much from the whole sector, which actually creates a capital discipline as well. So like I would personally separate insurance, which looks pretty good.
So now let's move on to the tech sector. And I'm gonna start with James, this is your
little baby.
JA
[laughter] Tech, yeah.
PT
Can tech continue to do what it's done in '24 in the last few years? Are we gonna see more of that in '25?
JA
'25 should be good for tech. I think that is the potential surprise in midcaps and smalls because the growth is actually there. Although multiples have rallied hard, in many cases, the growth is still there for these stocks. And the thing is, when you use the word tech in Aussie mids and smalls, it goes across so many sectors. You've got the traditional software tech, so software businesses; then you've got consumer tech, which is REA, carsales; then you've got health tech such as Prometicus; then you've got your FinTech, which is your Hubs and your Netwealths. So there's a lot of tech generally, and all those stocks have done incredibly well in '24, and all of them have got very strong outlooks in '25. So it's hard to see that not doing well as a class. So, yeah, I think, although tech was up 50 % for the year as a benchmark for the year of '24, it should do well in '25.
PT
Casey, any other additional views?
CL
No, I broadly agree. I think a lot of these companies have big potential markets, structural growth opportunities. You've probably got an environment of falling interest rates which is good for long duration growth companies
PT
Yeah, good point
CL
And a lot of them and their revenue in US dollars as well which could be good. And finally I think it's it's hard to put tariffs on software, so I'm not saying they're immune but I think there's less danger than on physical goods for geopolitical risk in software.
PT
Yeah the US dollar has definitely been the consensus trade and it's been strong, isn't it? It doesn't look like it's going to stop soon. The only thing I would add to that commentary is, you know, the one missing area I think in economies, in Australia's economy and all around the world is productivity. And we really have been missing productivity. And when you think about, that's what needs to happen, I think for us to keep going. And I look to the tech sector really for that productivity growth. And I think when there's limited productivity, if a tech company can provide can help other companies improve their productivity that product will sell well.
JA
So yeah, it's a huge thing. I mean, that's the thing. I said that last year as well, I think when you got high Inflation, very tight labour markets, high cost of debt and Governments and corporations trying to reduce costs like just everywhere they can, technology is very often the answer to that. So for the world, for corporates, families, individuals, governments, countries - like technology is being, it will be used more and more. So I do think it is very much yeah a huge theme.
PT
Okay so let's jump on to the next really interesting area which is the consumer. And as I said, the consumer's really held up, I guess, much better than originally thought. But, you know, the interest rates are staying high for a while, there still is a cost of living. There does definitely seem to be a two -speed, maybe movement in the consumer. Casey, how do you see the consumer in 25?
CL
I think you're right, probably the buzz words around consumer has been resilient or robust, and they've enjoyed some pretty strong tail winds over the last few years with migration running at record levels, government giving out a lot of free money in stimulus checks, and then a lot of people were still on these very low fixed rate homelands if you go back a couple of years ago. But I see a lot of these of these tailwinds turning into headwinds as well. I think there's potential that interest rates in Australia stay high for longer. I think inflation is stickier. I think those excess savings have really dwindled. You can see the savings rates at zero for Australia close to it. And it's really only the people that are over 55 years that are still seeing their savings balances grow. And the younger you get, the quicker you're seeing your savings balances decline. And migration looks likely to be curtailed, become an election issue as well. And I think your labour market is loosening at the margin you still see job ads are declining as well. So there is potential for that to go up. So yeah, I think it's a fairly tough sort of environment. I mean, the offset is that you've had tax cuts, but in the recent data, it doesn't seem to have been a huge stimulus to retail sales. And in fact, I think if you look at, if you break it down in its most granular level and you look at the retail volumes per capita, so you're taking out inflation, you're taking out migration, you saw in the September quarter, it was down 0.1 of a percent, which is the ninth consecutive quarter that that measure has been down.
PT
Right. Yeah.
CL
So it's been good in the aggregate, but if you look at it on a personal level, it hasn't been that great.
PT
Yeah. I guess immigration has probably really saved us in Australia as well, on to that point, isn't it? At an individual level, it's been tough, but we've had a lot of immigration, which has been very positive for the economy.
CL
Absolutely.
PT
James, now you do global as well as Australia
JA
Correct
PT
Do you see much difference between the Australian consumer and the global consumer? How do you view the consumer in '25?
JA
They're similar. I mean, the Aussie consumer was very patchy, and so was the US consumer, but the US consumer and consumer stocks did relatively well. But again, it's the same as Australia. It's just very patchy. So ones that were winning share did well, ones that had leading products that captured the consumer's imagination or they became very desirable products. Those ones held up a lot better than mid -range and low -range product areas. And I'm definitely more positive on Aussie stocks that have a global edge to them. So like Lovisa, for example, or a market leader like Temple & Webster has done well, even JB Hi -Fi did quite well performance -wise and fundamentally as well. But the core consumer that as more mid to low end has really struggled.
You've had a lot of announced bankruptcies this year in consumer in Australia, and I do think the consumer is on average doing it pretty tough which is what Casey's sort of saying and the data supports it as well. So it's not very bullish, but I think the pockets of stocks that performed well are either structural winners or they've managed things incredibly well this year. And they've surprised on the upside and they've got rerated on that basis. So yeah, global and Aussie actually very similar trends in consumer.
PT
So maybe '25 is the year gets a little bit tougher for the consumer, but there's still good opportunities if you're selective, where those, you know, there's still structural stories, which I think is important.
Okay, '24 versus '25. When we started '24, I think people were very bullish, which also '24 turned out to be a great year as well. As we sit here, started 25, are we just as bullish? Are we now more ? Because valuation is, I guess valuation has moved up a bit as well in that bullish '24. How do you view the market in 25 and put valuation into that?
CL
Well, yeah, for Australia, I think you're right, Paul, valuation is high. It's well above sort of long run averages. So for the market to perform again as strongly as it did in '24, you really need earnings to come through. We've seen, you've been in earnings downgrade for about 18 months now. And there is some signs that it's starting to bottom out, the second derivative has turned. But we really need to see the global macro pickup. I mean, the global PMI is a huge driver of Australian earnings across the board, across the whole market. But you know, I think there's some good signs that we are in for that sort of soft landing and unlikely to see a recession.Even though you know, some recession indicators have been triggered over the year: the yield curve and the Sahm rule. But when I look at most indicators across the market, we're in a much better position than in previous cycles when those indicators have turned. So I think we can see earnings growth or earnings upgrades come through in Australia, particularly in some of the more cyclical sectors, which is another segment of the market you can see rotation into, I think over the course of '25. But I think in general, it's gonna be a volatile environment as well, there's so many risks that still overhang us with new political administrations in all around the world. You have wars raging that could stop or and affect commodity markets like Russia, Ukraine. There's just a lot of risks around. So I think the path is up that it could be a volatile path.
PT
The second derivative is always, that's a good point. I mean, often markets will follow the second derivative and the second derivative is really acceleration or deceleration, not just growth. And I think that's always a good lead indicator.
James?
JA
I think it should be a good year. There is growth, which is good. But I agree with Casey. There's going to be a lot of volatility and we've seen it already in quality stocks and momentum stocks that disappoint, they're off 30 -40 % very quickly. So those sectors that have done incredibly well, and stocks that have done incredibly well, need to really deliver. But the index at 22 times PE already is a pretty high level. So it's setting I guess a very high expectation paradigm in investors mindset going into 2025. So any volatility or any disappointment, there's going to be challenge overall. It should be a like a decent sort of, you know, year. We've had 20 % returns for a couple of years as well, like led by the S &P, but also in mids and smalls. So that sets up, you know, a pretty challenging to do that three years in a row is pretty challenging. So I think, yeah, I think it will be volatile, but good. But yes, it all depends on the earnings and valuations are going to be dependent on delivery.
PT
Okay, so that all sounds maybe cautiously optimistic.
CL
Yes. Yeah, I think that's fair, which is yeah.
PT
I'd probably agree with that as well. Okay, now this is what everybody's been waiting for. We did quite well in 24. Let's see how we're going to go in '25. And we'll recap this when we come back to
you next year. James, what's your prediction? What's your prediction for 25?
JA
I'll say tech performs very well as a sector. So I think that's that's a given. The thing is, is that tech fintech, health tech, medtech? That's the question. But we'll just have to keep it on to tech, I think we'll do well is my view for 25.
PT
I like it. Casey?
CL
Well, I'm gonna double down on last year's bold prediction and New South Wales will win state of origin again.
PT
You've gotta lose sooner or later.
CL
It's the start of a dynasty, I think.
PT
Oh goodness.
CL
But in terms of markets, I think in Australia, the key event is gonna be the federal election sometime in the first half. And my bold prediction is we're gonna have a hung parliament. We're gonna have a minority government. I think if overseas elections are anything to go by, there's going to be a big swing away from the incumbent Labor government, really driven by, you know, those cost of living pressures that have hit home and the government is often the scapegoat for that. But at the same time, I think there's potential for either or both of the greens and the teals, the independence to win a lot more seats as well. So I think it could be in a situation where we've got a minority government, which is not great for the growth outlook, because it means it could be hard to put through fiscal stimulus, fiscal spending. And if we look at the recent period of growth in Australia, it's really been driven by government spending and immigration. And actually, the private sector has been pretty weak, been basically in recession. So it's a risk to growth if they can't get that spending through.
PT
Excellent okay Casey I like it except for the part about New South Wales winning state of origin, all else yeah. And for myself I'm actually going to go down the rugby union track for my prediction this year. We've got a big British and Irish Lions are touring Australia in '25. I'm actually going to predict the Wallabies win across the three matches. So now that is a big prediction. I think Joe Schmidt has got the Wallabies back on track. We had a much improved performance in Europe just recently. So that's my big sporting prediction. In terms of markets, I actually think, you know, we've been, the IPO market has been closed now for a while. I actually think we could see that reopening in 2025. So, you so new companies coming to the market. I think we could also see a bit more merger and acquisition activity, I think led out of the US, maybe some of the potentially regulatory changes in the US could lead to more M&A, which will then lead out around the world as well. So more M&A, more a renewed IPO market and in a solid performance in 2025.
PT
So I think that's our predictions. Let's see how we go and we'll, yeah, fingers crossed. I think that's exactly right. Now, just before we sign off, I just want to remind everybody about the competition. And we're off to our Christmas party, so guess the three iconic movie characters we have dressed up as the first with the correct answer, and send those to the email podcastsaustralia@fil.com. First one, we'll get $100 Westfield Voucher.
We actually, we wanted to take the opportunity to wish everyone a very merry Christmas and an even better 2025 and importantly, good returns in 2025. And thank you. Thank you for listening.
If you'd like to, if you'd like what you heard today, please subscribe to the podcast on your favourite platform or if you want more information please head to the Fidelity website at fidelity.com.au.
See you in '25.
JA/CL
Thank you.
Christmas competition!
