Weekly recap
What happened in markets
The Australian sharemarket lost ground, following what was an abnormally eventful corporate earnings season. The standout was the Technology sector (-12.3%), following weakness from major constituent WiseTech (-26.5%), as shareholders face governance woes from its founder. Lower commodity prices also dampened the Materials sector (-5.3%), with the price of iron ore (-0.1%), gold (-2.0%) and oil (-0.5%) all down. Some highlights from corporate results included Qantas’ (+5.1%) earnings beat and resumption of its fully franked dividend, along with Woolworths’ (-2.3%) earnings miss, following supply chain disruptions, industrial actions and intensified discounting.
US sharemarkets weakened, weighed down by big tech and ongoing uncertainty around US President Donald Trump’s political agenda. Tariffs, their impact on growth, and how they will be offset by corporate tax cuts remains a key concern. The Magnificent 7 continued their underperformance this calendar year, with Tesla (-13.3%) and Nvidia (-7.1%) among the biggest decliners last week. Nvidia’s all-important company earnings result was in the spotlight and came just ahead of expectations. Despite this, Nvidia’s earnings beat was by the smallest margin in some time, failing to counter bearish sentiment that dominated the market’s mood last week.
European sharemarkets ended higher last week, representing ten consecutive weeks of gains. Banks, insurance and utilities companies outperformed, partly offset by technology and resource stocks. Defence related stocks also strengthened, boosted by an increase in military spending in the region. This increased expenditure has been triggered by Trump’s policy agenda, as the US transitions to a more “America First” approach. Economically, a continued softening of inflationary pressure helped buoy asset prices.
Stock & sector movements
What caught our eye
Following Australia’s first interest rate cut in February, we revisited the domestic economic outlook and assessed whether our sharemarket remains attractive compared to global opportunities.
Our Investment Committee continues to hold an overweight position in international shares, balanced by an underweight allocation to Australian equities. While domestic shares will always play a fundamental role in an investor’s portfolio, there are times when strategic tilts can create better opportunities. Now that the Australian rate-cutting cycle has begun, does our current allocation still make sense?
We believe it does. Australia’s GDP growth remains sluggish by both historical and global standards. Without an uptick in government spending and a post-pandemic population boom, we may well have seen a technical recession in the past year or two. In fact, Australia has been in a per capita recession since early 2023. Notably, government spending accounted for all of the GDP growth in the year to 30 September 2024. If you strip that out, the private sector is clearly struggling. Household consumption is weak, and private investment remains low. Lower interest rates should provide some support, but this will likely be offset by the normalisation of both population growth and public sector spending.
That said, it’s not all bad news. We still expect the economy to recover, with real GDP growth returning to a more ‘normal’ 2% by 2026, an improvement from the latest annual figure of just 0.8%. However, from an investment perspective, the key question is whether Australia offers the best relative value for client portfolios.
With Australia’s soft growth outlook, you might expect our sharemarket to be trading at a discount, both historically and compared to global peers. But that’s not the case, see below.
Market consensus suggests Australian equities will deliver low earnings growth, yet they continue to trade at a premium relative to global markets. The US remains the most expensive, but at least its valuations are underpinned by strong earnings expectations (assuming they materialise). Part of this can be explained by the composition of our relative markets. In Australia, premium priced banks with low and steady growth represent a large chunk of our market. Meanwhile, in the US, pricey tech stocks with high growth potential dominate.
In this environment, our preference for international shares remains well supported.
The week ahead
This week, we will be watching key economic updates, including Australia's December quarter GDP, building approvals, and household spending, which will give a clearer picture of the economy's health.
Globally, the US nonfarm payroll report will provide insight into the strength of its job market. With growing concerns about the impact of Trump's tariffs, this data will be especially important for assessing economic momentum.
Portfolio Company Reports
Wade is the head of the Investment Services division at Cutcher & Neale and has over 10 years of industry experience in accounting and investment advisory roles.
Ryan is our Portfolio Manager, bringing over 15 years of experience in managing multi-asset investment portfolios with a specialisation in fundamental equity analysis.
