Welcome to the Friends with Money podcast, brought to you by Money Magazine, creating financial freedom for Australians since nineteen ninety nine.

Hello and thanks for joining us for another episode of Friends with Money, money Magazine's podcast to help you earn, save, and achieve your financial goals.

My name is Tom Watson, AEC and journalist here at Money Magazine, and as always it is a pleasure to be with you.

Well, we are only halfway through the year at the stage, but our, boy, oh boy, what a wild ride investors have had so far.

I don't know about you, dear listeners, but There's been more than a few days when I've logged into my investment app only to be confronted with a a big old red negative sign, and then I've quietly logged out back to way.

A week later, those things will have totally changed.

So there you go.

That's twenty twenty five in a nutshell.

Enough about me though, As has become a bit of a tradition on Friends with Money over the past couple of years, Today we are going to undertake our half yearly review.

We're going to talk about some of the causes of the volatility that we've seen in financial markets so far in twenty twenty five, what the impact has been on various asset classes and as much as we can, we'll take a bit of a look at the forecast ahead.

But in this world, who who knows what's going to happen?

And very please say that.

Joining me today to dive into those areas and more is Jonathan shed Head of Investments Australia at States treat Investment Management.

Jonathan, A very warm welcome to you.

It's a pleasure to have you on Friends with Money, Thank you, Tom, delighted to be here.

It's great to have you on mate.

Before we take a look into I guess some specific asset classes.

I think it would be really useful forever and if you could set the scene for us a bit, you know, what are some of the macroeconomic and the geopolitical factors that have really impact acted market so far this year and I guess created some of that volatility that we've all started to become a bit more familiar with.

Yeah, look, in a word, it's tariffs, and tariffs isn't the only word, but it's certainly the biggest word in the first six months.

But I think it's worth reflecting back why tariffs was such a marker in the first six months, and if you go back over the five years prior so, starting from COVID through to the end of last year, you know, we obviously had economic contraction with COVID, we had a strong rebound in the next year, and then we had inflation come roaring back, but economic growth held up despite you know, rapid increases and interest rates and so on.

Economic growth held up.

And so coming into this year, at the start of the year, if on actual markets were thinking, you know, is inflation really under control or isn't it?

Can interstrates continue coming down?

Is the labor market going to hold up?

So markets were on tent hooks to some extent, and so when the tariff announcements came, and everyone knew they were coming, by the way, but the size of those tariffs were so large that markets got spooked about what was going to happen to inflation in the US in particular, and what was going to happen to global growth, And that was the context for that huge set off we saw at the beginning of April.

Since then, we've had a lot more certainty.

Tariffs has started to fade as that driving force, and in fact markets are up above where they were before that announcement in early April.

So tariffs is certainly the biggest I think geopolitical factor in the first six months.

There have been a few others, though that investors might have missed in all the noise around what's happening in the US.

For example, in Europe, so Many eased some of their restrictions on government spending, and we think longer term that's going to be great for Europe on infrastructure and defense spending and so on.

So that was one a theme that slipped by.

AI has been another strong theme over the last six months, and that's really played out in a few different areas in financial markets.

The first is in the kind of strategic rivalry between the US and China, where deep seek and the fact that maybe other players can start to generate real value in AI space started to come to the fore and China has actually performed very strongly this year.

Also the actual profits from companies and technology who are involved in that revolution, and then finally the impact on longer term productivity, both for the broader economy and for corporate profits.

So I think that would be the next theme, and the final I just referred to a bit closer to home perhaps, is the surprising situation we're in now, Tom, where Japan is leading the board on inflation and everyone else's cutting rates, and yet Japan is the one rising.

And that's been another significant geopolitical factor, I think in the last six months.

So that's what that's what I'm seeing in the first six months of the year.

Tom.

I'm glad you bought some of those other kind of non tariff factors up there, Jonathan, because, like you said, I feel like they get lost in the noise so often that the announcement that you talked about in Germany being a prime one there.

I think I feel like we could on my sur sard different podcasts to talk about all this, but we don't have one yet, so we'll continue on.

I think I'd love to take getting into some specific asset classes now then, and I think a great place so start would be with equities.

Again.

We could probably do another entire podcast on how equities have performed this year.

So broadly speaking, Jonathan, how have they fared in the first kind of six months of twenty twenty five.

Well, it was looking pretty ugly in the first week of April, but since then equities have rowed back, and broadly speaking, equities are at higher levels than they were at the end of March.

The UK and Europe have actually done better than the US in the first six months of the year.

However, looking forward, if you look at earnings and sales and those key corporate metrics, the US we think is probably looking a bit stronger going into the next six to twelve months, and perhaps places like Europe and Japan.

So I think with inequities, while Europe and the UK have had a pretty good run, we probably prefer the US.

I think over the next six to twelve months.

The US is looking fully valued, but it's not crazy valuations, and some of the recovery in the US wasn't just limited to those mags seven, those very very large stocks, and in fact, more broadly with in equity markets, you know, we're looking for that recovery to continue in some of the sectors that have been a bit neglected, so smaller companies for example, or within emerging markets and some of those other areas.

So that's broadly what's happened within the equity market over the first six months of the year.

Of course, there's a lot more happening below the surface.

Well, maybe I can pick your brands very briefly on what's kind of happened close to home on the you know, in Australia.

How have Australian markets, I guess performed compared to the US and the rest of the world has been so slightly rosier started twenty twenty five, the Australian market has done okay.

I mean, clearly, the Australian market is closely linked to what's happening in China, and so Australia is caught in this tension between our largest trading partner and strategic rivalry with what's happening in the US.

So the Australian market's done okay over the first six months of the year.

I think for Australia and a few other countries in the Asia Pacific region, the rate of earnings growth compared to the price you pay is not something that we're seeing as hugely attractive at the moment.

So Australia a wrong with other countries in the region are probably not our favored places to go.

I think if you speak to your financial advisor, most financial advisors would suggest investors do have a core allocation to the Australian equity market, and at State Street we would certainly support that, but it's not an area where I think in the current environment we'd be going aggressively overweight.

Excellent point.

Well, let's move on then.

As I said, we could talk about equis all day, but we can't, or perhaps we shouldn't, So let's move on to to fixed income now then, Jonathan, if you don't mind so broadly speaking again, how has fixed income as an asset class?

I guess fared so far this year?

It's done fine.

If you look at long term interest rates, both in Australia and the US, you know they're kind of bouncing around somewhere between four and five percent.

Now, a four to five percent yield when inflation is running at two to three, I mean, that's not a bad number, right, So fixed interest markets are looking reasonably attractive.

The problem is that if you lock your money up for ten years at four to five percent and interest rates go the wrong way, you can actually have a capital loss.

So we do quite like shorter dated fixed income things like floating rate notes, for example, where you can get an extra fifty basis points to one percent above the prevailing interest rates in money markets.

Those sort of opportunities we think are quite positive.

Otherwise, we quite like fixing income.

Just be a bit careful about that those longer dated securities.

If we get inflation proving to be stubborn and interest rates staying higher for longer, there is one actually, Tom, at the risk of turning this into a two hour podcast, I think the fixed interest chart that has caught my attention is what's happened to the thirty year bond rate in the US.

Now, that might sound a little bit esoteric, but the thirty rate bond yield in the US, the gap between that and the tenure bond rate in the US, has been steadily climbing.

This is one chart in the first six months of the year that doesn't look like a V shape or a upside down mountain or something like that.

It's a steady climb and that we think reflects the market's concern about things like the long term sustainability give the US deficit and things like that.

So that's a little bit esoteric, Tom.

And again, without turning this into a politics podcast, has some very relevant things going through American Congress right now isn't there, So we'll all wait and see see what happened there with that potentially big, beautiful bill.

We've touched on equities, we touched on fixing income, but I also want to get you your thoughts on gold as well, Jonathan.

I feel like I saw tons of headlines last year about gold prices and record highs for gold.

But how's it fared, I guess in twenty twenty five.

Yeah, so gold has had a really strong run over the first six months of the year.

It's gone from twenty six hundred dollars an ounce US up to over thirty three hundred ounce.

That's an increase of sort of twenty five to thirty percent, which is really significant.

There's one caveat all place there, and that everyone talks about the gold price in US dollar terms, but the US dollar has actually been weakening over that period.

So if you were to look for an Australian investor, I mean to be a twenty percent return, there's still a big number, but that the return is not going to be quite as large.

I think the second thing about gold is not only the return, but also the way it's behaved in times of a market crisis.

And I think what the market noticed was the last big crisis we had earlier this year, bonds and equities kind of went the same way, and so this idea of diversifying where you don't have all your eggs in one basket and if one asset class performs poorly, then the other one will do well, that didn't really work for bonds and equity, and I think a lot of the interest in gold comes from investors who are trying to find an effective diversifier within their portfolio, and certainly at State Street, that's something we've looked at gold to do, is to provide that diversification.

Other reasons for the increase of things like central bank buying.

We've certainly seen plenty of that physical gold, particularly in places like India and China.

It's a very active market.

It's a big part of the global gold market that's been buying there, and also within managed funds and ETFs, we've seen more buying of gold bullion within those kind of investments as well.

So we think that three thousand dollars US is probably a reasonable flaw going forward.

To fall below that, you'd need to have a real de risking in the geopolitical landscape, so you know, a fantastic thawing of relations between Charina and the US for example, that's the kind of environment where you might see gold slip back well again, given the year that we've had, who knows what's going to happen in the future in regards to that and other things.

I don't think.

I feel like you've already given us plenty of food for thoughts already in terms of what might lie ahead.

But before we, I guess, start to write things up today, is there anything else that you'd like to leave us with in terms of financial markets and the outlook ahead for them in the months ahead.

Look, I think Tom, we're still a little bit cautious, so we think the global economy will have a soft land, but there are risks to the downside, and so you know, overall we underweight equities in the short term, but those positions can change very quickly, and I think Tom, for longer term investors, you're better off speaking to your financial advisor, finding the right mix for you and then don't do too much to it.

And in fact, our longer term model portfolios that we offer to clients through financial advisors, we actually didn't change the allocations at all in the last twelve months.

We toyed with maybe putting some emerging markets in there, we toyed with a couple of other things, but actually decided to leave them unchanged.

So if you're someone who speaks to a financial advisor and doesn't change things that often, well, don't worry.

Certainly at State Street we think you're in good company.

Certainly, certainly what I have been doing sitting on my hands, and maybe I should add logging out of my app as well to make sure I turned don't get too dressed out and buy everything that's happening and just think about the long term rather than the blips along the way.

This has been absolutely fantastic.

It's been a pleasure to have you on, so thank you so much for your time, for giving you such a comprehensive review of what's happened and what we might look forward to in the months ahead.

So, as I said, it's been a pleasure, and we'll look forward to having you back on again soon, perhaps to come and give you a score in terms of some of those forecasts that you've given us since how you've done.

Looking forward to it, Tom, Thank you.

That's it for this episode of the Friends of Money podcast, but don't forget to jump on our website moneymag dot com dot AU for your daily dose of financial news.

Or you can go grab yourself a copy of the late Decision of Money magazine in all good news agents.

As always, Friends with Money will be right back in your podcast feed next week, so until then, my name is Tom Watson.

Goodbye for now, Thanks for listening to the Friends with Money podcast.

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