Despite initial expectations for slower US growth at the start of 2024, the US economy largely surprised on the upside. Combined with the initiation of US Federal Reserve (the Fed) interest rate cuts, this set the stage for attractive returns across most asset classes. US mega-cap companies drove the US equity markets to a second consecutive year of 20%+ returns—a feat achieved only four times since the 1930s.¹ Even the previously out-of-favour Chinese stock market posted solid double-digit gains, while Bitcoin, gold, and the US dollar also delivered strong returns. 

A few asset classes underperformed, notably long-term bonds, commodities, and the Australian dollar. Stronger growth and resurfacing inflation concerns put pressure on long-term bonds, while worries about China’s ability to revitalize its economy weighed on both commodity prices and the Australian dollar. While the Reserve Bank of Australia (RBA) kept interest rates on hold, the Fed initiated a rate-cutting cycle that is expected to continue throughout 2025. The final month of 2024 marked the largest monthly tally of rate cuts across G10 central banks since March 2020, when turmoil from the COVID pandemic roiled global markets.² 

The US economy continued to expand at a solid pace throughout the year, with corporations posting positive earnings and the labour market remaining relatively tight as employers steadily added workers. However, in mid-2024, weaker economic data emerged, driving the US 10-year bond yield down by 100 basis points to a low of 3.6%, coinciding with the start of the Fed’s rate-cutting cycle. In the final quarter of 2024, stronger economic data, coupled with expectations of fiscal looseness through tax cuts and the inflationary impact of tariffs under a newly elected Trump administration, reignited inflation concerns. As a result, bond yields ended the year at 4.57%, near their highest levels for the year and 70 basis points higher than at the start of 2024. Expectations of US rate cuts were also tempered. 

The Australian 10-year bond yield mirrored the movement in US bond yields. Australian economic data followed a similar pattern to the US, with weaker-than-expected numbers in the first half, followed by stronger-than-expected results toward year-end. Lower commodity prices, driven by a slower Chinese economy, weighed on the Australian dollar, which finished the year just below 62 cents—a level not seen in the last two decades outside of COVID and the Global Financial Crisis. Meanwhile, the Australian housing market remained resilient, with early-year price growth giving way to more mixed results as the year progressed, particularly in Sydney and Melbourne. Australia’s labour market remained robust, with low unemployment, though wage growth slowed in the latter half of the year. 

The year ahead 

Looking ahead, the global economic outlook is cautiously optimistic. Inflationary pressures have eased globally, and central banks have room to lower rates further to support growth. The potential for productivity gains remains high, particularly with artificial intelligence (AI) adoption gaining momentum and a renewed push in the US to cut regulatory red tape. 

For Australia, this cautious optimism presents both challenges and opportunities. While the global economic backdrop is stabilizing, Australia remains highly sensitive to fluctuations in commodity prices—especially with ongoing concerns about China’s economic recovery. However, Australia’s strong domestic labour market, solid population growth and resilient housing sector provide some buffer. The Australian dollar’s weakness, while a drag on imports, can benefit exporters, particularly in the resource and agricultural sectors. 

As always, the biggest risks for markets come from the unexpected. The emergence of Chinese company Deepseek as a potential disruptor rattled global equity markets in mid-January. Although share prices have mostly recovered—and in some cases, risen above previous levels—it underscores that many risks come from what investors aren’t anticipating. The return of Trump to the White House has also caused market volatility, with what seems like daily swings in sectors and individual stock prices. While his early moves appear to be economic threats to extract concessions, the possibility of a global tariff war—though unlikely—would likely weigh on risk asset prices. 

Provided bond yields remain contained, which we expect, investors should be rewarded this year by stock and sector allocation decisions. The historically low Australian dollar is likely to drive further corporate interest in Australian assets. Listed real estate still offers opportunity to acquire assets below Net Asset Value and recent evidence of a transition to rising valuations from declining ones, will likely tempt investors into the sector. A global trend of employers applying increasing pressure to return to work combined with significantly higher replacement costs and limited new supply should provide opportunities in the premium office sector.

Private credit continues to offer attractive returns, and with more capital flowing into the space, Australian investors will need to be additionally discerning when selecting asset managers as the market matures. While US markets remain elevated, a narrow group of companies have driven this, with investment opportunities in other sectors available at attractive multiples. We expect global private equity funds to be active participants.  

Alternative assets should continue to be in high demand, with the tailwind of an aging population and the associated desire for yield very much intact.