The 2025 mid-year outlook

Macquarie Group’s Chief Economist, Ric Deverell, looks at Australia’s position as global instability continues – covering domestic growth, Australia’s advantages as trade tensions endure, and the all-important cash rate.

In addition to the economic outlook, we are pleased to share a report from the Macquarie Wealth Management Investment Strategy Team with their views on the road ahead for investors.

2025 is shaping up as one of those years where those investors with discipline and conviction in portfolio management will be rewarded over those who try to pick winners. Macroeconomic and geopolitical forces have pushed and pulled sentiment in different directions at different points in time and there seems to be no end in sight.

In the first half of the year markets reacted to nearly every piece of information on trade tariffs coming out of the White House, but updates became more readily absorbed by the end of Q2. Resilient hard US economic data during the period provided the buffer even though it’s still too early to know the magnitude of the shock and the collateral economic damage. However, the threat was enough to cause large swings in US imports and business inventories, so the underlying drag on consumer spending, which is yet to play out, could be large as well.

Similarly, the inflationary consequences of tariffs are yet to occur. US margins and input costs at the macro level haven’t yet suffered and inflation remains well behaved. This has given room for central banks to pivot and support growth and at this stage they are easing to prop up growth next year rather than head off a recession. Normally bond yields fall when both policy and inflation are easing, but this hasn’t been the case thus far. We highlighted a few weeks ago that global savings and investment are no longer widening, and this is helping put a floor under bond yields that will mean that even if a recession develops policy and inflation are not likely to test the zero bound.

In our 2025 outlook we warned that geopolitics would drive asset class and regional returns and its clear this will likely continue. The Middle East conflict that began confined to Israel and Hamas has escalated, with Iran and its nuclear capabilities now the focus. No one knows where this will go, but further escalation remains possible. The conflict has halted the equity market rally and bumped up the gold and oil price, but markets remain remarkably resilient thus far.

These uncertainties mean it’s easy for investors to get wrong footed taking big bets. We believe diverse portfolios are the best way to navigate this uncertainty and we continue to think investors should do this in several ways.

• Private and alternative assets are our preferred strategy for mitigating near-term volatility and protecting against downside risks to growth.
• In fixed income, lock in higher ‘all-in yields’ in quality fixed rate credit alongside floating rate senior secured private credit.
• In equities, we prefer EM, Europe and Japan over Australia and the US. Both Australia and the US are expensive and highly stock concentrated markets. Australia has the additional headwind of a weak earnings outlook. Europe and Japan are more diversified markets than Australia and the US, and they have a solid earnings outlook with more attractive valuations.

The key investment themes underpinning our portfolio positioning includes:

• The US remains the global growth engine. It is slowing but should pick up next year.
• The disinflation process is near its end, but policy will likely ease further.
• Stock concentration is a key risk in the US and Australia.
• Longer dated bond yields are unlikely to fall significantly further even as policy rates come down.
• Military conflict is highly unpredictable. The immediate threat is escalation rather than de-escalation.

We are more certain that central banks have the room to support any unexpected slide in growth than we are about a return to a more stable trade and geopolitical outlook, so any positive surprises for markets are likely to come from central banks having more conviction about cutting rates. The list of potential negative surprises seems to far outweigh potential positives, so investors should buckle up and be well prepared to ride out the remainder of the year.

- Paul Huxford

Chief Investment Officer
Macquarie Wealth Management