2025 Family Capital Outlook

Text on screen:  James Maunsell, Account Manager 

Maunsell: Thanks for joining us for the 2025 Family Capital Outlook video. I'm joined by portfolio manager Adam Bowe. 

Adam, looking back at 2024, it was a year where the market was able to shrug off a lot of outside noise and led by the magnificent seven, delivered great returns for diversified investors. 

Today, we've got an environment where there's a new administration in the US, we have simmering geopolitical tensions and very active central banks. 

In that uncertain environment, how can investors think about allocations to equities and are there are a few magnificent reasons to be owning bonds?

Text on screen: Adam Bowe, Portfolio Manager 

Bowe: Well, I think for our Family Capital clients, there are some incredibly attractive reasons to own core bonds in that world you've just described in the outlook that we're staring down for 2025. 

As you said, inflation is coming down.  Cash rates are coming down. Even the RBA joined the global easing party. 

You've got defaults and restructuring in pockets of particularly property and direct lending into construction increasing. And as you said, geopolitical risks and uncertainty with relations to tariffs causing a lot of volatility. 

And the starting point of equity valuations is really high. So I think if you look at that backdrop for 2025 and then you say, also there's this alternative of high quality, daily liquid core bonds that are still yielding more than a percent above the cash rate, that generally have a correlation that's low or negative to risky assets. And I think the case for core bonds has rarely been this attractive. 

Maunsell: You mentioned the RBA. Let's shift gear and unpack the most recent RBA decision. You and the team had been calling for a February rate cut for some time. Can you provide some reason behind that thesis and provide some insight into what we can expect from the RBA in 2025? 

Bowe: Yes, I think for the last couple of years our core thesis for the RBA has been that they would have to stop at a materially lower level of cash rate relative to their global peers and that was because the amount of household leverage on balance sheets. We've got one of the most levered households on the planet and interest rate changes flow really quickly to cash flows for households.

And so our thesis was that a cash rate of four point something was going to be as tight as a cash rate of five point something in other parts of the world.

I think that core thesis is largely played out. A 4.35% cash rate brought inflation back from eight and around 8% to 2 to 3%. We had a per capita recession. There's been no growth in real GDP outside public spending for the last 12 months. 

So it tells us that 4.35 was very tight and it's done the job. And so from here we think with inflation back in the band and forecast to remain there, the RBA has to start moving back towards neutral. 

And we came into the February meeting with an expectation of about 100 basis points of cuts through 2025 and we haven't changed our view. 

Maunsell: Finally, we've seen a flurry of recent media headlines relating to stresses in the private markets. Are those front-page restructurings indicative of wider credit stress? And how should investors be thinking about global opportunities both in the public and private markets? 

Bowe: Well, I think that the stress in certain pockets of direct lending, particularly those exposed to property development, construction is real. As you said, you only have to read the AFR every second day. There's headlines in that space. So the risks are real. 

I would say two things about investors comparing opportunities through this year in private and public markets. On the private sector, well at least in the private fixed income sector, I think you need to have caution and diversity. I think the opportunity set will continue to get more attractive over the next say, 1 to 2 years, as stress continues to come out of that space. There’s been a flood of capital into the market. Assets in some pockets aren't cheap and stress is rising. 

And so I think, being cautious, selective and also having a diversity both across sectors and geographically, not just in Australia but diversified globally, is going to be really important. So as I said, pockets of direct lending, particularly in property, look stressed and rich but there's areas in asset backed lending that look really attractive, both in Australia and globally.

So a cautious diversified approach and having capital to deploy through the next couple of years as more attractive opportunities come up in private markets, I think is key. 

The point for public markets is the opportunity’s right now. As I said, as we started the conversation about geopolitical risks and tariff uncertainty, as we said, we've got cash rates coming down, term deposits coming down, inflation's back in the band, uncertainty is elevated, we've got a hybrid market in Australia that's disappearing, so the opportunity for core bonds that are still yielding between 5 and 6%, also have ETF formats for investors looking for exchange traded alternatives. I really don’t think the case for core bonds has been this attractive in a long time. 

Maunsell: Thanks Adam, and thanks for joining us. If you have any questions on today's content, please reach out to your PIMCO account manager.