April 2025 - Market Update
8 April 2025

Market Update – April 2025

Market & Portfolio Update – March 2025


Market Summary

During the quarter the TWD Plus managed accounts delivered positive returns, delivering returns between 1.2% and 1.6% across the risk spectrum. International equities were a key contributor delivering alpha over the quarter.


Outlook

Markets experienced a downturn during the quarter as the S&P/ASX 200 fell by 3.1% amid a broad sell-off in risk assets. This decline was driven by weaker-than-anticipated earnings and increased macroeconomic certainty. While Consumer Staples managed to post modest gains, sectors such as IT and Healthcare faced significant challenges as valuation multiples contracted amid slowing earnings growth. Around 65% of reporting companies managed to meet or exceed analyst expectations, with standout performances from firms like Hub24 and Qantas, contrasted by a steep decline at WiseTech following governance issues.

Australian macro data continued to signal a cooling economy, with inflation moderating to its lowest levels in years, nearing the RBA’s target. This disinflationary trend paved the way for the RBA to implement a 25bps rate cut, marking the first reduction since 2020. Despite this easing move, officials remained cautious due to persistent labour market tightness, particularly in the public sector, though further cuts could be on the horizon if wage pressures subside.

In the US, the market sentiment was mixed as the S&P 500 edged down by 1.3%, influenced by mixed earnings from large-cap tech companies despite strong performances from smaller firms. A significant focus during the period was on capital expenditure trends among major tech firms investing heavily in AI infrastructure. While these investments underscored confidence in emerging technologies, they also spurred investor caution regarding the returns on such spending. Broader US economic indicators presented a mixed picture, with continued disinflation tempered by a notable contraction in personal spending.

Looking ahead, market participants are navigating an environment of evolving economic policies and shifting fiscal landscapes. In the US, policy adjustments aimed at rebalancing trade and potential tax cuts could bolster corporate earnings by reducing competition from imports. In Australia, the anticipated benefits of lower borrowing costs are expected to ease financial pressures for companies and support household spending.  We also continue to see reasonable prospects for two more rate cuts from the RBA in 2025. Overall, we are adopting an active approach to stock selection and sector allocation as we prepare for potential rate cuts and ongoing macroeconomic shifts.


Trump’s reciprocal tariffs

The Trump administration’s reciprocal tariffs were announced today across 60 countries, with only a very few seemingly exempt (including notably Canada and Mexico). At a high level, each country was impacted with a base line tariff of at least 10%, including Australia, rising to 54% (including previously announced tariffs) applied to China. The most impacted countries were largely felt across both Asia and Europe, as Latin America was left relatively unscathed.

Broadly, markets have viewed these tariffs as a threat to global growth. Many economists are now predicting RBA will cut rates in May, as well as pricing in up to three further cuts for the remainder of the year. This is good news for Australian government bond investors, as the market catches up with these developments.

The market volatility, while unsettling in the short term, will undoubtedly create opportunities for patient investors to take advantage, which we are increasingly seeking to capture. While the noise may persist, we believe strong fundamentals and global diversification will ultimately prevail.


Portfolio Changes

We are making several changes to the managed accounts this quarter, outlined below:

  • Increased Hedge Ratio on International Equities – We are increasing our hedge ratio to around 50% on our international equities sleeve across all risk levels by either selling VanEck MSCI World Quality ETF (QUAL) or iShares Global 100 ETF (IOO) and allocating to the Arrowstreet Global Equity Hedged Class (MAQ1878). Arrowstreet employs a quantitatively driven process focused on large-cap equities in both developed and emerging markets. 
  • Changes to the Alternatives Sleeve – In our Alternatives sleeve we replaced the JPMorgan US 100Q Equity Premium Income Active ETF (JPEQ) with iShares Asia 50 ETF (IAA), targeting major Asian companies poised to benefit from AI-driven productivity gains.
  • Adjustments to Australian Equities – We are slightly reducing our exposure to Australian equities by exiting our position in Vanguard Australian Shares Index ETF (VAS) guided by our asset allocation process. 


We are making these changes to reduce the risk of large losses that would be sustained if the sentiment downturn we saw during the first week of March were to accelerate. With the changes we have made, our international equities asset class has a 1 year forward P/E ratio of around 13x, providing us a sizeable valuation buffer over the MSCI World Ex Australia Index.

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