AMP’s chief economist Shane Oliver has outlined a “worry list” of potential threats, including overvalued markets, geopolitical tensions, and uncertain monetary policies that investors may encounter in 2025.
However, he has also highlighted reasons for optimism, with easing inflation, expected interest rate cuts, and resilient growth providing a brighter outlook.
Here’s a closer look at the key risks and silver linings shaping the year ahead.
Overvalued share markets
· The US market’s 26x forward PE ratio and a negative bond-yield gap pose challenges. While Australia’s valuations are slightly better at 20x, they’re still not cheap.
Uncertainty around central bank policies
· Rate cuts from the Fed, RBA, and others remain uncertain due to persistent core inflation challenges.
Rising bond yields and recession risks
· Bond yields could climb, pressuring shares. Risks of recession loom, particularly in the US and Australia, due to tight monetary policies.
Geopolitical tensions and trade wars
· Heightened risks in Europe, Asia, and the Middle East, along with potential global trade wars spurred by US tariff policies.
China’s economic fragility
· Challenges from modest policy stimulus and US tariffs threaten China’s economy, despite some stabilisation in its property market.
Geopolitical and political instabilities
· Ongoing conflicts in Ukraine and the Middle East, combined with European political uncertainty and Australia’s upcoming election, add to the global risk profile.
Potential for increased market volatility
· After a relatively calm 2024, heightened risks suggest a turbulent 2025.
Reasons for optimism
Easing inflation trends
· Slowing demand growth, easing labour markets, and mild commodity price declines.
Central banks likely to cut rates
· Expected rate reductions from the Fed, ECB, and RBA could support growth.
Resilient global growth
· While slower, growth is projected at just below 3 per cent, with notable strength in China (5 per cent).
Mild recession scenarios
· Lack of prior spending booms suggests any downturn would likely be shallow.
Focus on economic stability
· Trump’s policies, despite disruption, are expected to prioritise share market growth and cost-of-living reductions.
