- Pengana International Equities Limited
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Global Market Review – January 2025
Global equities strengthened in January as inflation continued to moderate, enabling central banks to further ease interest rates. However, the release of a new AI model in China reminded investors that rapid innovation can swiftly impact tech stock prices.
Earnings grind higher as the US economy keeps growing
Global equities jumped 3.5% in USD terms, but just 2.6% in AUD terms as the US dollar weakened during January.
US stocks rebounded at the start of the year following some profit-taking at the end of 2024. January’s gains reflected continued strength in the US economy, which grew 2.3% in the December quarter. Unexpectedly strong jobs growth helped push December unemployment down to just 4.1%. The US recovery appears broad-based with growth in retail sales, existing home sales, and industrial production.
Falling new rents and slightly weaker wage inflation helped push the December US core consumer price index down to 3.2%. However, this remains above the 2.0% inflation target of the US Federal Reserve (Fed), which led it to keep interest rates on hold at its January meeting. The Fed is also likely concerned about the possibility that the new Administration – which took office in January – will increase tariffs, restrict migration and boost government spending, potentially pushing inflation back up.
However, equities were boosted by a generally strong start to the US December quarter corporate earnings season. Technology groups such as Apple, Facebook-owner Meta Platforms and Netflix all announced better than expected profits. Meanwhile global financial services group Visa – a bellwether of the global economy – reported increased profits as spending rose over the holiday season.
But innovation in China sounds a warning to big tech
Share market volatility spiked when Chinese artificial intelligence start-up DeepSeek released a new large language model, R1. It claims to have been developed much faster and using far fewer advanced chips than comparable Western models. This casts doubt on forecasts of demand growth for computing power and hence for the advanced semiconductors this requires.
This brought big falls in share prices of a narrow group of chip developers. It will take time to fully assess the implications of DeepSeek, but a leap in AI efficiency could reduce input costs, energising innovation across the AI value chain.
Nonetheless, China’s equity market moved lower upon fears of US tariffs and weakness in its household sector. While stimulus measures boosted industrial production and economic growth, the economy remains close to deflation as house prices continue to fall.
In contrast, most other developed markets followed US equities higher, supported by 0.25% interest rate cuts in the Eurozone, Sweden, and Canada, whose economies remain subdued.
Australian share markets roar ahead
Australian share markets reached new all-time highs during January, gaining 4.4% after fourth quarter trimmed mean inflation fell further than expected, to 3.2%. This reinforced market expectations that the Reserve Bank of Australia (RBA) will begin to lower interest rates in February from the current 4.35%.
This reflects nervousness in the broader economy, as consumer confidence remains squeezed by elevated mortgage rates. National home prices remained unchanged in January but fell in Sydney, Melbourne and Canberra. A surge in new job seekers nudged unemployment up to 4.0% in December, although public sector hiring kept the labour market tight.
Investors are concerned that steep US tariffs will slow China’s economy, reducing its demand for imports and impacting Australia’s commodity exporters.
Outlook
- ‘Higher for longer’ interest rates have slowed the global economy but services inflation persists
- Interest rates are expected to fall further in most developed economies except Japan
- Slower consumer spending and weaker industrial output are impacting the earnings of some cyclical companies
- Geo-political risks remain elevated
- More efficient AI models may accelerate innovation across the sector
Where does this leave investors?
While economic activity and corporate earnings growth continue to slow gradually, there is little sign of a near-term global recession. Pengana portfolios are firmly focussed on companies able to grow earnings as interest rates remain elevated and consumer spending slows.
These include businesses with a technological advantage especially in AI, groups engaged in manufacturing automation and onshoring, pharmaceutical companies able to secure drug approvals, premium luxury goods houses and healthcare providers.
Companies with highly cyclical earnings, strong exposure to discretionary consumer spending, high borrowings or unsustainable business plans should be viewed cautiously.
Stimulus measures in China should support well-managed businesses whose business models support its government’s strategic priorities, but which don’t depend on exports or sensitive western technology.
Tim Richardson CFA, Investment Specialist