The global economy has continued to sustain solid growth and avoid recession despite the implementation since 2022 of tight monetary policy by most of the world’s major central banks in an effort to lower inflation. Over the past year, inflation has been trending downwards, leading the International Monetary Fund (IMF) in its October report to report that ‘the global battle against inflation has largely been won’. In its latest report (January), however, the IMF noted that while global disinflation continues, it remains ‘elevated in a few cases’. Nevertheless, official interest rates have been coming down, with the US central bank (the ‘Fed’) and the European Central Bank both lowering rates in recent months and with the IMF noting that ‘monetary policy rates of major central banks are expected to continue to decline’. The IMF is also expecting tighter fiscal policy and would like to see ‘domestic reforms that boost technology and innovation, improve competition and resource allocation, further economic integration and stimulate productive private investment’.

In the case of the US, the US presidential election held last November saw the return to government from 20 January this year of an administration led by President Donald Trump. This 4-year term of government is expected to resemble Trump’s first term, during which he initiated a number of measures that supported economic activity and lifted the international competitiveness of much of the US economy. In particular, Trump has indicated that he would like to see the corporate tax rate cut from the current 21% (set in Trump’s first term after he cut it from 35%) to 15% for companies willing to bring manufacturing back to the US. He is also trying to boost oil and gas production, which could see a lift in US exports as well as a potential drop in inflation. Regulation is also expected to be cut significantly, as is the overall level of government spending.

The Australian economy remains weak, growing by only 0.3% in the September quarter. On a per capita basis, it remained in recession, contracting for the seventh quarter in a row (by 0.3%), with the economy unlikely to have gained much momentum since then. A key factor driving this slowdown has been tight interest rate policy by the Reserve Bank (RBA). This has weighed on household spending, with discretionary spending contracting over the year. In December, the RBA’s preferred measure of annual inflation moved into the target range at 2.7%, opening the way for a potential small cut in interest rates in February.

Most share markets have been on a broadly upwards trend since October 2023 on the assumption that interest rates had peaked and would soon begin to be reduced. This has been particularly supportive of the more interest rate sensitive sectors of the market, including the technology and property sectors. Last year, market movements included rises of 23% for the broad US market (S&P500), 29% for the technology-focused Nasdaq, 19% for Germany, the UK 6%, Japan 19%, China 13%, India 8% and Australia 11%.

Major sovereign bond markets have been volatile this year, with yields (interest rates) rising and falling in line with the outlook for inflation. The US 10-year Treasury bond yield fell to a record low of 0.54% on 9 March 2020 during the pandemic but touched 5.0% in October last year before sliding down, then rising again. It was 4.53% on 30 January this year. Similarly, the Australian 10-year bond yield was 0.57% on 8 March 2020 but was 4.38% on 30 January 2025. Some bond markets could see yields fall (and prices rise) over coming months if growth remains soft and if inflation continues to fall back towards targets.

Fiducian’s diversified funds are currently above benchmark for international shares and listed property and around benchmark for domestic shares. Exposure to bond markets is close to benchmark, while cash holdings have been lowered.

Disclaimer: The information in this document is given in good faith and we believe it to be reliable and accurate at the date of publication. Fiducian Investment Management Services Limited (Fiducian) ABN 28 602 441 814 and its officers give no warranty as to the reliability or accuracy of any information and accept no responsibility for errors or omissions. The information is provided for general information only. It does not have regard to any investor objectives, financial situation or needs. It does not purport to be advice and should not be relied on as such. Investment and tax advice should be sought in respect of individual circumstances. Except to the extent that it cannot be excluded, Fiducian accepts no liability for any loss or damage suffered by anyone who has acted on any information in this document. Past performance is not a reliable indicator of future performance and we do not guarantee the performance of the Funds or any specific rate of return. Potential investors should also obtain and consider the relevant Target Market Determination (TMD) and Product Disclosure Statement (PDS) (available from your financial adviser and via fiducian.com.au) before making a decision about whether to acquire or continue to hold any financial product. Fiducian Investment Management Services Limited is an Australian Financial Services Licensee (AFS Licence No. 468211).