Well, the end of 2024 is here and the ASX has posted over 10 record closes this year alone signalling the strength in Aussie equities against a challenging macroeconomic backdrop floored with many headwinds.

In 2024, we had China’s sluggish recovery post pandemic hit earnings of our big miners and any companies with exposure to the region, Trump elected as the next President of the USA, Gold prices surging to record highs, retailers surprising to the upside despite high cost of living pressures, and inflationary pressures in Australia showing signs of easing.

While a crystal ball would be handy to give some form of certainty amongst the chaos of markets heading into 2025, we have fundamental outlook driven by key catalysts as outlined below.

Where are markets heading in 2025?

Moderating inflation – with drivers like wage price inflation, retail spend, services inflation, and housing prices, remaining sticky in 2023 and 2024, the outlook for rate cuts was dim as the RBA took a more cautious approach to lowering the nation’s cash rate than the US which also had a more aggressive rate hike strategy. However, in 2025, we expect such key inflation drivers will continue to moderate which will pave the way for the RBA to cut interest rates and ease the cost-of-living pressures for Australians. While these drivers are showing the right signs of easing, it is very much still a month-by-month analysis basis as we have seen before that certain catalysts can reignite inflation growth in a very short period of time – e.g. Black Friday sales periods driving retail spend.

One area of concern on the inflation front remaining sticky is unit labour costs or the cost to produce one unit out output as these have risen more than 5% YoY and faster than pre-pandemic therefore indicating higher cost for lower productivity.

Key takeaway: the RBA will monitor the key inflation drivers closely before even hinting at a rate cut. Rate cuts are not expected until at least mid-2025.

US outlook: The Fed signalled 2 instead of 4 rate cuts for 2025 which sent Wall St into a selling frenzy late in 2024, which may spark the start of pullback in equities as valuations have crept into overvalued territory in recent months especially for those in the AI space.

China 2024

In 2024, the final data dump out of China revealed mixed, yet still weak economic recovery in the region.

November retail sales grew just 3% YoY, below October's 4.8% and economists' 4.6% forecast.

China’s house price index fell 5.7% YoY which is a slight improvement on the October reading but still shows new home prices continue to fall in China.

The unemployment rate in China also remained at 5% in November which was one area of positivity in the collection of data released as the reading was below market predictions.

And finally, China’s industrial production reading for November showed a slight improvement from October but activity levels remain well subdued from this time last year.

Collectively, the data shows despite over 7 trillion yuan being promised as stimulus out of the Chinese government in recent times to reignite growth in the region, Chinese consumers are holding onto their money and the region continues to struggle post pandemic.

China growth picture 2025:

China’s growth rate is expected to be 4.8% in 2024, which is below the country’s target of around 5% growth as the region continues to struggle with material recovery post pandemic.

BUT in 2025, with 7 trillion yuan in stimulus promises, markets are questioning if that amount is even enough to reignite growth in the region or if another year of subdued demand is on the cards in 2025.

Pending the outcome of the stimulus packages, economists expect growth of 4.5% to 5% in China next year, but it will depend on the total amount and impact of the stimulus with some calling for over 100 trillion Yuan to reignite material growth in the region. What we saw in 2024 was many countries around the world shift reliance away from China into emerging markets through forming new trade partnerships so this may impact China’s growth along with the proposed Trump Tariffs which are expected to hit Chinese exports hard.

Australian economic growth – is expected to recover gradually in 2025 after the likely slowest growth in 32 years in 2024 (aside from the COVID pandemic).

Key takeaway: China’s stimulus will be the key driver of economic growth in 2025. We expect the recovery in Australian economic growth will be underpinned by improving economic conditions as inflation eases, interest rates are cut, and real household income grows.

Earnings appreciation from rebound in global demand as interest rate cuts announced.

As we enter the rate cut cycle, we expect global demand and growth will moderate if not rise and this will fuel earnings growth for our listed companies. In FY25 we project single digit earnings growth due to the higher input and operational cost environment driven by elevated interest rates in the near term, however, with rate cuts near, we expected double digit earnings growth will follow as consumer demand rises and operating costs moderate.

Key takeaway: Earnings growth is expected to remain in single digits for FY25 before recovering in FY26.

Trump inauguration on 20th January and subsequently him taking office will see some changes and impacts to markets. The most notably is tariffs and the extent to which these are introduced.

US inflation has the potential to take off again after Donald Trump retakes office in January 2025. The incoming tariffs on goods imported into the US drives up the prices of goods sold in the region as cheaper alternatives from overseas are not available or become more expensive thus fuelling the fire for inflation to rebound.

Trump called for a 25% tariff on products imported from Mexico and Canada as well as tariffs up to 60% and more on goods imported from China, in a bid to stimulate domestic demand within the US economy. The extent of the tariffs and exact figures will likely be unveiled after Trump takes office late in January 2025 which we expect will have a short and sharp impact on markets as investors digest and shift portfolio positions to adapt to the tariff implications.

‘Drill baby drill’ may impact commodity prices – supply demand equilibrium interruption which could place further downward pressure on the price of key commodities as further supply comes online.

Key takeaway: Trump’s presidency will bring some headwinds for trade and we will likely see investors react to his policies and regulations early in 2025. Companies with exposure to the US and operations in the region will likely benefit from the tariffs like James Hardie Industries and Iperion X.

Healthcare

Underperformed most of the market this year but there are a few key companies on the horizon next year that have critical read outs, clinical trial conclusions and regulatory approvals to submit as they each near commercialisation including Opthea, Clarity Pharmaceuticals, Telix Pharmaceuticals and Neuren Pharmaceuticals.

Neuren Pharmaceuticals has entered Phase 3 trials for its second asset which is targeting 4 rare neurodevelopmental disorders that currently have little or no treatment available. Bell Potter’s analyst Thomas Wakim believes the value inflection point for Neuren is a few years away while the Phase 3 trials are completed and the company’s first drug, Debut, continues to grow in sales globally for the treatment of Rett Syndrome.

Opthea has some critical Phase 3 read outs in Q2 of 2025 for its Wet AMD treatment for retinal diseases. The company is a single asset company so the outcome of the results and pathway to commercialisation has a binary risk profile, but upside potential makes this company an exciting watch for our analysts in 2025.

Clarity Pharmaceuticals has an array of data and clinical trial readouts coming in 2025 from its next generation cancer imaging agents that can detect tumours in the prostate much earlier than most agents available on the market.

Key takeaway: Healthcare underperformed much of the ASX sectors in 2024 however key clinical read outs, data and submissions drive tailwinds heading into 2025.

How will ASX perform next year?

• PE ratio for materials sector is below general market right now due to being sold off in 2024, thus we see investment opportunity in the materials sector in 2025 especially as demand for critical metals like copper and gold.
• Financials stock valuations were elevated in 2024 due to the safe-haven nature of big bank investment in the eye of investors. While we expect interest rate cuts in 2025 and net interest margins having peaked, we see valuation of the banks as overvalued at these levels, while small caps and diversified financial exposure offer compelling investment opportunity. Bell Potter has a buy on Regal Partners and Perpetual.
• The key index and certain stocks are unlikely to replicate the stellar returns we have seen this year, but never say never.
  
  This year the ASX200 is up 8% which is surprising given the headwinds faced across the board, but what does 2025 have in store?
  • Real Estate stocks benefit from a low interest rate environment which is on the horizon in 2025. The sector was boosted in 2024 by Goodman Group and its expansion into data centres. We remain bullish on Goodman’s data centre expansion and the sector’s outlook for 2025 given the outlook for an eased cost pressure environment and greater demand for office REITs as companies increasingly implement a ‘return to office’ policy.
  • Telco stocks only rose a mere 3.3% in 2024 which minimal value and interest for investors. The sector has low but stable growth which is expected to continue into 2025.
  • Energy stocks underperformed in 2024 due to China’s weak recovery, geopolitical tensions, and commodity price volatility. We expect moderation in the sector in 2025 and tailwinds for uranium stocks amid increased demand by big names like Microsoft investing in Nuclear power to power AI expansions.
  • Tech stocks still have headroom with earnings appreciation and no signs of slowing growth on the AI demand front. While some valuations look excessive, companies verging profitability like Life360 are poised for a big year in 2025.
  • Consumer staples stocks underperformed in 2024 and were weighed down by heavyweights of the sector like Woolworths. It is unlikely this sector will face tremendous growth in 2025 as investors look for opportunities elsewhere in high growth and value areas.
  • Travel stocks remain on the journey to recovery post pandemic and with oil price moderation expected costs for our airlines will likely ease thus driving margin appreciation.
  • Retailers will likely face headwinds in the first half of CY25 before conditions moderate as interest rate cuts are announced (if and when). The retailers targeting younger demographics though will likely continue to rally through the first half of 2025 as demand remains unaffected by rates and the December period is traditionally a high-spend season for younger consumers.
  • Materials are expected to rebound amid anticipated growing demand for critical metals like copper and a hopeful boost to China’s economic recovery.
  • But in 2025, growth is likely later in the year, however, early on we expect the ASX 200 to remain relatively stagnant as inflationary pressures remain mixed and determine the timeframe to interest rate cuts.
  • Financials sector added 34% this year while in 2024 almost every broker had a sell on CBA – challenging the traditional valuations on the market.

So strap yourself in for an eventful start to 2025 kicking off with President Donald Trump regaining office.