December 2024 Update from the Australia Trade Floor
Text on screen: David Orazio, Head of Distribution, Global Wealth Management
Hi and welcome to this month's trade floor update. Today I'm joined by portfolio manager Rob Mead.
Rob, we're sitting here today with the Australian cash rate at the same level as it was this time last year. Now that's despite central banks cutting rates. What does this mean for investors this year?
Text on screen: Rob Mead, Co-head of Asia-Pacific Portfolio Management
It's a pretty interesting one. On the surface it looks like nothing much happened. But as we know, underneath there’s been so much activity.
So first of all, you're right. The RBA is still at 4.35. They've been there the entire year. And even ten-year bonds started the year around 4%, ending the year around 4%. But I guess that masks a lot of things that have been taking place.
As you mentioned, central banks have been cutting. Almost every other developed market has had at least one rate cut, if not multiple. Obviously, we've seen the US election now done and dusted. We have a winner. And we've also got risk assets, Bitcoin, those sorts of things that are close to, or at all-time highs.
So given that backdrop, it's not surprising in many ways that we've got a lot of this volatility beneath the surface. But I guess the really important thing looking forward is the RBA is still not ruling anything in or out.
We think that it's going to be a changing backdrop as we move forward. But I think very importantly you’re starting to see a few cracks appear in the residential property market in Australia. So the opportunities that are appearing for next year are really compelling.
Now, despite some short-lived pockets of volatility, you mentioned a few in 2024, it's been a really good year for investors across the board, with most asset classes probably returning very strong returns in 2024.
Orazio: Now, as investors turn their attention to 2025, what are some of the risks but also opportunities that investors should be focusing on?
Mead: Yes, let's start with the risks and finish on a positive note. So I guess the biggest risk leading into 2025 is reinvestment risk. And so we've already seen term deposit rates start to come down.
We do think the RBA will be cutting rates in ’25 probably to the tune of close to 100 basis points. So some decent moves coming.
But the opportunities are still there. As I mentioned at the start, risk assets have been incredibly sanguine given that we think we'll be in a headline induced phase of volatility.
So given the levels, there's just not much cushion priced. Like if something's a bit disappointing the downside for some of these really expensive or arguably quite expensive assets, is quite material. So you need to be cognisant of that.
The good news is, and the opportunities for bond investors is that rates are still high. As we mentioned, RBA still hasn't moved. So the potential for capital gain, the potential for income generation is still very alive and well.
As we know, as inflation comes down towards targets, the lower negative correlations between bonds and other asset classes, the riskier asset classes, tend to move in a positive direction. So you do get the benefit of diversification.
We also know that the starting yield is a very clear indicator of expected returns from the bond asset class. So all these things are really aligning. And when you think about what happened last year, rates barely moved but bond funds returned 7 or 8%. So it was a really great year. And we think that looking forward, some of those same backdrops apply equally.
Finally, we've seen the announcement from APRA that the hybrid market or the AT1 market, will be going away. So as things start to get called early in 2025, the role of core bond funds, the role of core bond ETFs is going to be so much more compelling as a source of replacing some of that income. So we expect to see that to play out as well as we move into next year.
So I guess as an active bond manager, we couldn't be more excited as we lead into ‘25.
Orazio: Thanks for your insights Rob.
Now investors should be really pleased with their return outcomes for their portfolios over 2024. As we've heard today, with diverging economies and policy outcomes, 2025 poses both risks and opportunities for investors to consider.
As always we're here to help and thank you for your ongoing support and look forward to touching base with you in 2025. If you have any further questions, please reach out to your PIMCO account manager or visit our website.