Economic Overview

For the past year up until 31 March 2025, portfolios have continued to perform well, with International Shares and Australian Shares leading the pack. Property and global infrastructure also delivered solid year-on-year performances. This marks a significant improvement from the tough markets of 2022, where every investment asset class took a hit and cash was still only earning us 0.1%.

Interest Rates

The Reserve Bank of Australia (RBA) has kept the cash rate steady at 4.10% as of April 2025, following a 25 basis point cut in February. However, market expectations suggest multiple rate cuts are likely this year, with some analysts predicting up to four reductions, potentially bringing the cash rate to as low as 2.8% by year-end. This outlook reflects easing inflation and concerns over global economic conditions.

Currency

The Australian Dollar is currently trading at around $0.59 for US$1, significantly below the longer-term average of $0.75. We continue to expect a gradual return to this long-term mean, introducing some currency risk. Hedging international investments partially (45%-50%) remains a prudent strategy to manage this risk and reduce volatility.

Inflation

Inflation has moderated significantly. As of February 2025, Australia’s core inflation rate was 2.8% year-on-year, with headline inflation at 2.4%. Both measures are now within the RBA’s target range of 2-3%, earlier than anticipated. This easing reflects restrictive financial conditions and subdued demand.

Key Factors Affecting the Market

• Interest Rates: The anticipated rate cuts by the RBA could provide relief to borrowers and stimulate economic activity.
• Inflation: With inflation under control, consumer purchasing power is stabilising.
• Import/Export Markets: Global supply chains are normalising, reducing delays and costs.
• Tariffs: The recent tariffs imposed by the US have introduced significant market volatility, impacting global trade and investor sentiment.
• Geopolitical Risks: Ongoing tensions, including the impact of US tariffs, continue to create market volatility.

Investment Strategy

Patience remains key. Stick to your plan, apply smart strategies, and re-allocate according to your risk tolerance. This approach will reward the brave, especially in fluctuating investment markets.

Cash

Cash remains a stable, low-risk asset. Though it doesn’t offer high returns, its stability makes it a reliable option for meeting short-term expenses like insurance premiums or pension payments. By using cash reserves to buy more long and medium-term assets during price dips, we can help preserve your portfolio and maintain purchasing power during volatile periods.

Impact of Donald Trump’s Second Term

Donald Trump’s re-election has had mixed effects on the markets. His policies have introduced significant volatility, particularly through tariffs and trade restrictions. The US economy faces a heightened risk of recession, which could serve as a “reset” to lower the Greenback and recalibrate global trade.

Revised Trump Effect economic scenarios:

1. Strong Growth, High Inflation
   • Likelihood: Low. The global economic environment and restrictive trade policies make this scenario less likely.
2. Strong Growth, Low Inflation
   • Likelihood: Very Low. While productivity gains are possible, the current economic headwinds make this scenario improbable.
3. Weak Growth, High Inflation (Stagflation)
   • Likelihood: Moderate. Stagflation refers to a situation where economic growth stalls or declines while inflation remains high, creating a challenging environment for policymakers and investors.
4. Weak Growth, Low Inflation
   • Likelihood: High. A US recession appears increasingly likely, driven by restrictive trade policies and declining consumer confidence.

Investors should remain focused on their long-term strategies and be prepared for potential market fluctuations. Staying calm and utilising our bucket strategy will continue to be essential as we navigate these economic conditions.