The Active Investor: From Macro to Micro – 2025 Themes and Investment Outlook

 

Steve Hiscock:

Firstly, a very happy new year to you all. We hope you all had a restful break. My name is Stephen Hiscock, and I have the pleasure to be your first podcast host today. I’m one of the founders and the chair of the board of SG Hiscock and Company. I’ve been in funds management since 1987, working at HSBC Asset Management, then National Australia Bank’s funds management company before forming SGH with four others in 2001. It hasn’t always been an easy ride, but it’s always been interesting. Today in the studio with me is also our Chief Investment Officer Rob Hogg. Hello Rob and Happy New Year.

Rob Hogg:

Hi, Steve. Happy New Year to you as well.

Steve Hiscock:

Rob has a fascinating background in investment and economics. Spanning his career, he has been across most asset classes. Over his time, he’s been a chief economist. He’s been a senior portfolio manager for Australian equities. He’s headed up asset allocation, global equities, and fixed interest teams and Quant Strategies and Macro Research.

At SGH, along with being our Chief Investment Officer, Rob is also Head of Individual Portfolios. So Rob, let’s start off by briefly looking backwards at 2024. Can you please give our listeners the high-level numbers what happened to markets over the last 12 months?

Rob Hogg:

Thanks, Steve. Look, I think, we might start with Australian equities, just looking back over the year that was.

Part of the Aussie equity market performed relatively similarly, and that’s by size. So, the ASX 300 provided a total return of around 11.5%. Small ordinaries up around 8.5 percent and mid-caps,  a not dissimilar sort of amount. So, by size, performances weren’t enormously dispersed. But, By sector, they did vary enormously.

So within the large cap universe, the ASX 300, industrials returned around 20%, whereas resources fell by almost 15%. Now it was really a story of the banks versus the miners in 2024. The banks, particularly CBA, Westpac and NAB, were amongst the largest stock contributors to overall performance of the Aussie market in 2024.

Whereas the energy material sectors were amongst the worst performing sectors and BHP in particular detracted the most value over the course of the year. So, whilst the Aussie market in Aussie dollar terms for Aussie dollar investors returned as I was saying around eleven and a half Compared with global markets, and this really reflects the weakness of the Aussie dollar, returns were much, much more modest.

And in fact, in for a US dollar-based investor, the return for the market in US dollars was only a little bit over 1%. So that really reflected the weakness of the currency. And we’ll come back to that a little bit later in the podcast. Just looking globally. at returns. I just wanted to focus mainly on the US.

Another significant returning year for the US. More than 20 percent return for the S& P 500. The second year in a row that the markets returned more than 20%. But as I’m sure a lot of the listeners will know, a lot of that was down to the Magnificent Six or the Magnificent Seven, as it’s variously described.

And by that I mean, S&P 500 in total. Returned around 25%, but if we exclude those 6 or 7 largest stocks, the return was only around 16%. I say only, because that would have still been a very solid return, but 10 percentage point difference really marks out the very, very significant impact and contribution made by those stocks.

So these, we’re talking here about the NVIDIA’s, the Amazon’s, the Meta’s, Alphabet, Microsoft, Apple, etc. stocks that that performed extremely strongly during the course of the year. And this, of course, occurred against a background in the US where the Fed was cutting rates, we didn’t have rate cuts here, where the, the, the economy continued to surprise on the upside, probably more so than we saw in Australia, although Australia did perform relatively well from a macro, overall macro perspective.

It was really about this AI innovation, thematic that was just such a powerful performer and driver of markets in 2024. Just leaving equities aside, just looking quickly at bonds and currencies, reflecting the fact that the US economy and market, I suppose, continue to surprise on the upside. We saw an increase in interest rates over the course of the year, more so among longer dated securities.

So 30-year bond yields rose around three quarters of a percent. Not dissimilar increase for the 10-year part of the curve as well. And those increases were probably around twice what we saw in Australia. Our 10-year yield rising around 40 basis points, and the 5-year around 30 basis points or thereabouts.

It really reflected the relative performance of the economies. On the currency side, the Aussie dollar quite weak over the year, uh, down almost 9% against the US dollar. That was really a US dollar story because against a number of other current currencies, the Aussie dollar was relatively unchanged, except, interestingly enough, the power against which the Aussie dollar was about as weak in its movement as it was against the US dollar.

So that was 2024.

Steve Hiscock:

Okay, I mean, it certainly, you know, it’s been an interesting market to, you know, if you were invested in the top, the mag seven or the mag six or whatever you say you’ve had, you’ve had an incredible year. But if you didn’t have big weightings in those, as you say, it, you It’s still been a good year, but it hasn’t been anywhere near as good as, as those six stocks have done.

So in terms of 2024, Rob, do you, what are some of the surprises that you’ve seen over the past 12 months? Were there, for you, were there things that were, helped shape markets over the past 12 months?

Rob Hogg:

Yeah, Steve, there are a number of, macro, but, but also market and, and policy related dynamics, which were surprises for the year.

And if we cast our minds back 12 months, I think most investors were expecting that, most, most economies would weaken during the year and that rate cuts would occur. One of the surprises I think has been the stickiness, as it’s described, of inflation and that’s, that’s really a global phenomenon and globally it’s been driven by the same sort of factors.

In the services sector, wages driven and driven by a range of domestically focused sectors. So that stickiness and inflation has had a big impact on what’s happened with interest rate cuts. They’ve been less, generally, than had been expected 12 months ago. This is also partly due to the fact that economies have performed probably better.

Not everywhere, but certainly in Australia, and particularly in the United States, macro growth was significantly greater than had been expected. So that was another surprise, along with the stickiness and inflation. And of course, to a large extent, the two, the two are quite related. Here, in Australia, it’s really, I think, been the jobs growth that has surprised most people.

Even at the end of the year, jobs growth was averaging around 35, 000 per month, and employment is up by around 3 percent over the year. I don’t think anybody really expected that. So that’s some of the macro, surprises. Other things, I guess, Trump’s re-election. Look, 12 months ago, he was not expected to win the presidency again.

Those expectations really didn’t change until October, when some of the betting markets started to really point to a rising likelihood of him winning. But, as I say, 12 months ago, that, looking ahead, that, that is a surprise.

Two other things, more so of a policy perspective, the Japanese raised interest rates in August at the time, that was a surprise for markets, and a very negative one. Um, the Chinese moved with some stimulus measures during the course, later course of the year as well. That was also a surprise for investors. And we saw, again, quite a significant reaction to that positively in, in the Chinese and Hong Kong markets.

But I think a lot of that reflected, positioning where a lot of investors had exited Chinese markets over the previous couple of years. And they rushed back in, some of them at least, following on these policy changes.

Steve Hiscock:

Yeah, that’s right. I mean, the, as markets have been significant underperformance, so it’s not surprising to see a bounce, but it really hasn’t continued on that side, has it?

It’s sort of stabilised and performed in line up. I mean, one of the things you mentioned which was interesting is the Australian economy. It is a surprise because I think many people would, would feel that the Australian economy is in a recession and if you back out population growth due to immigration, as an example, the numbers per capita aren’t quite as strong, is that right?

Well, not quite as strong as an understatement. The economy, I think, has contracted for seven quarters in a row on a per capita basis. What I think we’re really observing in Australia is just a very significant fiscal impulse. And by that I mean specifically, we’ve had government spending supporting employment in healthcare related sectors.

That’s been a key driver of wages, of income, of employment, population growth as well as reflected in the nature of per capita, the economy’s going backwards, but, in total. through population growth, we’ve actually seen the economy perform positively over the course of the year.

Steve Hiscock:

Yeah, which is a surprise that you’re talking about, really.

There was plenty of action on interest rates in 2024 around the world. Obviously in Australia, the central bank didn’t cut. But what were the key central bank actions? How did they affect markets? You know, what were the other factors that influenced the direction of interest rates? Maybe, I guess maybe start globally and then move on to Australia.

What are your thoughts are there?

Rob Hogg:

Yeah, look, I think it’s been an interesting year in the sense that what we’ve seen in interest rate markets has been that they’ve really evolved, yields have really moved, following very closely the evolution of growth and inflation expectations. We’ve had some, we had some months during the year which started out with very, very weak numbers.

In the US that tends to be employment and other related manufacturing indices. And in those months, we saw significant rallies in interest rates, so falls in interest rates. And we had other months where the absolute opposite happened. So, broadly speaking, yields have followed very closely, as they usually do, they’ve very follow, very closely followed the evolution of growth and inflation expectations month to month.

Just abstracting from that broader trend, the Fed’s first move in September with a cut of half a percent, the Fed’s that was a bit of surprise at the time, although the market pricing had moved toward that,  by the day they actually cut rates, but kicking off with a 50 basis point cut,  was a bit of surprise and did set up market movements for the next month or so.

The other thing I think that’s been interesting through the year is there’s the whole nature of what central banks describe as data dependency. And what they mean by that is that they themselves are looking at all the numbers, like all investors are, and it’s really how those numbers evolve and pan out that really drives their thinking, which of course is the case.

But in this day and age where central banks use what’s described as forward guidance, and that is trying to give the market a sense of what they might do next, this data dependency and vulnerability, if you like, to the nature and the pattern of economic data has led to a lot of volatility, and in fact, in the shorter areas of the US curve, that volatility is the highest it’s ever been for decades and decades outside times of recession. So that, I think, is just telling us quite clearly that markets are reacting to how they think central banks will react, and central banks are reacting according to how they think the data will occur. So we’re in this very, very tight sort of loop, if you like, market moves and central bank statements.

Steve Hiscock:

Okay, great, Rob. Thanks for that. I mean, it’s been an interesting year as always, really. Let’s look forward now to 2025. What do you see as the dominant themes for 2025? Particularly focusing on interest rates, economic growth, geopolitical trends, and so forth.

Rob Hogg:

It’s all the easy stuff.

Steve Hiscock:

That’s Yeah, exactly.

That’s I’m not sure which is the easiest one to start with, but  look, I must admit I find the start of the year is a good time, look, as is any time really, but the start of the year in particular is a good time to sort of try and get a sense of what consensus expectations are.

And,  I think one of the things I’m struck by, and I know others are as well, is  all of this talk about US exceptionalism. We see that a lot in the press. Well, we’re seeing it a lot in the press right now. And, of course, why wouldn’t this term come up, exceptionalism, after the year that the US market has had, and the nature of AI and those sorts of thoughts and thinking. We’ve seen very, very significant flows into, into the US market during the course of 2025 from offshore investors. So, so that theme of exceptionalism, to my mind, the question here is just how much of that exceptional performance of the US is already priced in. And you’d have to think that a reasonable amount of that is already.  So that’ll be interesting to watch how that pans out. One of the other seemingly consensus views is about China.  And the expectation that it’ll be negatively affected not only by its own internal dynamics, but also by US tariffs.

And the reason I mention these two, the US exceptionalism and China, is because they seem to be the most firmly held views, and as a consequence, the most firmly priced views. So if we’re going to see significant surprises in 2025, it’s not beyond the bounds of possibility that the US being less exceptional than truly exceptional, or China being less bad, quite frankly, might be enough to provide quite significant surprises.

But apart from the focus there, and of course the political focus of Trump and the uncertainty there, inflation, of course, will continue to be, the most dominant theme, I think, for 2025. So, related to that, and the Trump policy changes, a lot of market participants see upside inflation risks from tariffs in the US while imposed on US trading partners, as well as tax cuts and deportations and other policy measures that the new administration has spoken of. So perhaps a non-consensus risk is that the Fed, in fact, doesn’t deliver any interest rate cuts in 2025. Whereas I think in Europe, and also in the UK, as well as Australia, I think we will see the RBA start cutting rates.

So rate cuts here, rate cuts in Europe, rate cuts in the UK, upside potential risk to inflation. And US exceptionalism in China, they seem to be, at this point in time, some of the more important things will be in 2025.

Steve Hiscock:

Right. And look, as always, inflation is central to investors thinking. It obviously feeds straight into interest rates.

It is, as you say, there is a risk that inflation won’t be, going downwards as people think. So, I mean, it’s such an important influence on equity markets. Can we do, explore that a little bit more, just your thoughts on that?

Rob Hogg:

Yeah, so the performance of CPIs around the world was, look, probably a little bit more encouraging, and by that I mean easing pressures, slowing inflation.

Probably around six months ago, the last couple of months, we’ve seen, if you like a bottoming out. In some of the declines on a month-to-month basis. Anyway, and this is particularly so if we look at some of these underlying measures and, and this is the case quite clearly in the United States, over the last three or four months, their core measures, measured various different ways, have really stopped declining, on a month-to-month basis.

And it’s, it’s not dissimilar here in Australia where although the headline rate of inflation has generally been easing, the rate at which underlying measures are declining on an annual basis, so we still have inflation, but we’ve got degrees of disinflation. I guess the extent of that disinflation has eased and we’re getting signs of a troughing.

if you like, and the rate of change. So, and that, that, that is a real risk. More so in the US where if we do get tax cuts, if we do get tariff, related price increases, and if we do, a loss of some of the labour force, that, that, that has a number of the elements that, could well be associated with, a little bit more inflationary pressure than, than most are expecting now, as, as you were saying, that has a very direct effect on what policy makers may do and that could lead to no rate cuts in the US in 2025.

Steve Hiscock:

Right. In this context, I guess there’s an additional pressure because, as you mentioned earlier in the podcast, the weakness of the Australian dollar against the US dollar in particular, do you think that weakness that’s perceived in the dollar against some currencies is going to change?

Is further going to stop the Reserve Bank cutting rates in 2025, or do you think they will do a cut?

Rob Hogg:

Look, I think over the course of 2025, the RBA will be cutting rates. There’s, there’s a lot of evidence that policy is, is on the restrictive side. Well, we, I think we know that the growth in employment and population have stalled or mitigated some of that effect.

But look, a lot of the story so far is really just again, this US exceptionalism and the strength of the US dollar more so than weakness of the Aussie. But I think that the China story and investor, disappointment in the path of the Chinese economy. Particularly some of the deflationary pressures that now seem to be setting in.

Steve Hiscock:

I think that has likely been a drag on the Aussie dollar as well. Yeah, and just back on China, there’s increasing talk about the spectre of disinflation.

Do you see that as an additional issue for them? Do you think it’s likely, first, and do you think it’s a real risk for them?

Rob Hogg:

Yeah, no, I think it is very likely. If we look up, up the supply chain, if you like, prices have been falling and what we’ve seen in the last couple of months is quite a significant decline in 10-year, in Chinese government 10 year prices. Bond yields are now at 1.6%, so lower even than during COVID.

As well as we look at the start of 2025, Chinese markets are among the weakest year to date. Now I know we haven’t had days and days and days of trading, but look, I think a lot of this is pricing in the Trump tariff effect. Of all the areas of the world, China seems more certain than most. to suffer from Trump tariffs now, and I think investors are just looking at that side of the argument.

But of course, it’s highly unlikely that the Chinese authorities will sit idly by, and it would be very surprising if, they didn’t come back, Chinese policy makers, with some pretty significant policy changes to try and turn around not only sentiment but turn around macro trends as well in China.

And as I was alluding to earlier, given how negative sentiment is about China, and in fact how poor things do look in China, to be fair, things only need to look a little bit less bad. Bad. Yeah. For there to be significant moves, in Chinese markets.

Steve Hiscock:

The second derivative, if you like. It’s the change in direction of the second derivative.

Rob Hogg:

Exactly.

Steve Hiscock:

So, another thing that people have been talking about a lot in the past six months is how most of the major economies are running significant fiscal deficits. I mean, do you see this becoming a more, I guess, a worse problem for bond markets and equities than it has been?

Rob Hogg:

Look, this, this has been a question that’s been around, for decades and decades and decades, and, but I think fair to ask again, because we look at the state, particularly the US fiscal position, when the economy’s been growing and the deficit is as large as it is, that’s not really something we’ve seen before. But of all the countries in the world to be facing fiscal issues, There’s no one that are able to cope with it than the US given their position as such a dominant party in, in financial transactions at the US dollar and its role in the global economy.  I could be very trite and say it won’t be a problem until it is.

I am reminded however of a number of years ago when the US had its credit rating cut. And Bonds actually rallied in the US on the sake of that. There can be some adverse effects, but they come about, because of the US ‘s position in the globe. They have freedom to run deficits that no other country ever would. And certainly, Australia could not get away with, the type of fiscal, deficits that we see in the United States.

Steve Hiscock:

No, not without there being catastrophic influences of a dollar. Yes. Of the Aussie dollar.

Okay, so 2024 was pretty good for, equity investors.  I’m sorry to do this, but I’m asking you to take out the crystal ball now. And tell us what you think, equity investors should expect for the next 12 months. Impossible to get right, obviously, I know that, but as CIO, I know you’ve got some clear views on, on looking at the, the balance of rewards against risk.

So really just after your insights on this.

Rob Hogg:

Yeah, Steve, I will sort of look back and speak to some of the stuff we’ve been talking about just now. If we look at the relative performance between banks and resources, the huge outperformance of banks, is, has really marked 2024.

Look some of that is understandable. The economy has performed better than expected. Credit growth’s been better than most expected. And, and provisioning has been less than expected and asset quality has held up better than expected. So, against that background, it makes some sense that banks should do relatively well, but they’ve done enormously well and that of course in sharp contrast to the story with resources.

So, perhaps the opportunity lies in looking at on the other side of that trade, if you like, I guess one of the other things we might expect is if the RBA is indeed cutting rates during the course of the year, that would generally lead to a broadening out in, in contribution by equities right across the market.

And it might also be a more significant catalyst for some of the smaller cap names to start performing a little bit better as their environment improves relative to that of some of the larger caps.

Steve Hiscock:

Okay, and that’s obviously good for people invested in small cap funds. In terms of 2025, what do you see as the biggest risks then?

I mean, you’ve mentioned some of them, obviously, What should we be doing, if anything, to protect portfolios in this environment?

Rob Hogg:

Well, look, I think, I think the biggest risks are the usual risks.  Inflation is the biggest risk. I guess with a new administration in Washington, tariffs and, and policy change, there are some of the biggest risks.

But look, as we’ve been noting, recent monthlies. Broadly speaking, we remain optimistic, optimistic but cautious, about the equity market outlook. And we do expect a consolidation of the recent equity market moves, but we just don’t sense, we’re just quite at the point to see a very, very significant sell off.

The approach for us and the thinking for us has been that we’re on heightened alert, if you like, for opportunities that, that may lie as a consequence of unexpected moves, either policy moves or other macro moves, both in Australia, but, but more so global.

Steve Hiscock:

Okay, well, Rob, thank you. To put you on the spot, and I think I know the answer to this now because you’ve spoken a little bit about it, but if you had to make one prediction for 2025, obviously it’s impossible, but what would be that prediction?

Rob Hogg:

One prediction? Well, perhaps, we are surprised by China, positively surprised by China, uh, just given how, how negative, overwhelmingly negative sentiment is, uh, is now, perhaps it’s a year where the Australian market does better than, other global markets as a consequence of that, of China having a better-than-expected performance in 2025.

But also, as a consequence of rate cuts and what that will do, what it would likely do to, disposable incomes and mortgage rates in Australia. So perhaps, perhaps, the surprise is that Australia does a little bit better than, than is expected as well.

Steve Hiscock:

Oh, that’s good to know.

I guess, looking back at the podcast, with all the information you’ve been talking about what have you been doing in recent months regarding asset allocation for the individually managed portfolios, and what’s your view as to the next steps in that process?

Rob Hogg:

Well, one of the things we’ve been looking at, and one of the major, well not, one of the more major changes we’ve been making, is for those portfolios that have interest rate exposures. Just thinking about at what point in time is it, is it, is it opportune to start moving away from some of the floating rate exposures to some of the fixed coupon exposures in terms of the underlying equity holdings.

We generally haven’t made very significant changes to the holdings. We have a very long-term perspective on the names that we own, and we’re still comfortable with those names. So there hasn’t been any significant turnover in the names and the holdings, and at this point in time we don’t expect that to be the case.

It’s more so in potentially some changes in the nature of the interest rate, exposure.

Steve Hiscock:

Right. Well, Rob, that’s terrific. Thank you so much for your insights today. That brings us to the end of today’s podcast. What we’ve done, we’ve looked back at what happened in 2024, what’s in store for 2025, and, and really the, probably the key message for me, is there so much going on it’s critical to remain active as an investor, look at the China side, look at the US side and respond when new information hits because it could be some significant market moves given there’s two very clear consensus positions there.

We hope you enjoyed today’s episode, please subscribe so that you don’t miss out on future podcasts and follow us on LinkedIn and Instagram. Our website is sghiscock.com.au and that will include a copy of today’s podcast, so please visit it as there’s lots of information on it. Including updates, videos, research related to all our funds.

Thank you very much for listening today.

This podcast is produced by SG Hiscock & Company. It does not constitute financial advice and assumes a certain level of knowledge. It is general information only and does not take into account the investment objectives. Financial situation or needs of any person and should not be considered a recommendation.

The views in this podcast are those of the contributors at the time of recording. Neither SGH nor any of its related parties provide any warranty of accuracy. Returns are not guaranteed.

 

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