The Australian and global share markets had plenty to digest during April -the least not being the US tariffs and the apparent chopping and changing by President Trump on the quantum and which countries would be affected. Other factors such as a weakening US dollar, a falling oil price, continued geopolitical tensions across Russia/Ukraine and the middle east and the upcoming Australian Federal election also played a significant role.
Despite all those factors, the Australian market decided to shrug off the woes of March and instead react positively to the many, often cryptic utterances from President Trump that tariffs may be eased.
The US markets tried to stage a similar recovery during April, but continued volatility caused by economic news such as weekly job claims edging higher, the manufacturing index drifting slightly lower, and the first quarter GDP coming in weaker than expected at -0.3%, kept the bears in ascendence.
Despite these signs of weakness in the US economy there is little chance of Trump backing down too quickly and essentially it is a two-way battle between China and the US to see who blinks first.
Commodities during April
By and large April was a disappointing month for commodities with only nickel, uranium and gold showing a positive return. The nickel price recovered for no obvious reason apart from traders possibly thinking it had been oversold, whilst the uranium price picked up 5% on the back of supply and cost concerns for the US as it imports around 55% of its yellowcake from Kazakhstan and Canada which face reciprocal tariffs of 27% and 10% respectively.
Gold however continued to power ahead on the back of the continuing geopolitical concerns but mostly as it is considered a safe haven as the value of the US dollar continued to fall.
The biggest loser was oil, down 18.5% as it suffered from over production from both OPEC and non-OPEC countries, despite growth in demand slowing. At the same time, President Trump continued to talk the price down as not only does it reduce homegrown energy prices, it also places great pressure on Russia because oil sales are a significant funder for its Ukraine war.
Iron ore, coal and the industrial metals (copper, zinc, nickel, aluminium and lead) were all weaker as the tariff “wars” decreased economic confidence and the Chinese economy continued to show only sluggish growth.
Whilst the medium and longer-term supply/demand for the industrial commodities are still very much in favour of higher prices, the current global economic conditions and uncertain confidence suggests that prices could remain flat for the next 3-6 months at least.
Gold on and the other hand, as well as uranium (which is showing some strong positive technical signals) could continue to show good gains.
Australian Interest Rates
The Reserve Bank (RBA) will hold its next Monetary Policy Board meeting on 19th-20th May 2025.
Following the 25-point cut in rates on 19 February the RBA, Governor – Michelle Bullock has been quite unequivocal in follow up commentary that the RBA was still restrictive in its thinking and wanted clear evidence that inflation was beaten, before it would be willing to move again.
As a quick refresher, the inflation rate is measured by the Consumer Price Index (CPI) and it works by measuring the change in the price of a standardised group (basket) of 11 categories of goods and services, which account for expenditure by households across Australia’s capital cities.
This group comprises the following goods and services:
• Food and non-alcoholic beverages
• Alcohol and tobacco
• Clothing and footwear
• Housing
• Furnishings, household equipment and services
• Health
• Transport
• Communication
• Recreation and culture
• Education
• Insurance and financial services
The change in price based on this basket is currently measured on a March, June, September and December quarterly basis by the Australian Bureau of Statistics (ABS).
It is important to note that the prices recorded in the CPI by the ABS are after the effect for any subsidies or assistance provided by governments (state and federal) that are tied to the level of consumption of specific goods or services.
In this regard, a topical example of subsidies affecting the true measure of the CPI are electricity prices which are included in the Housing category.
Electricity prices for example rose 16.3 per cent the March quarter which followed falls of 17.3 per cent in the September quarter and 9.9 per cent in the December quarter due to the introduction of the second round of the Commonwealth Energy Bill Relief Fund (EBRF – see following chart) rebates from July 2024.
To further complicate the measure of true inflation, the CPI is reported as both the headline number and as the Trimmed Mean.
The Trimmed Mean provides a view of underlying inflation by reducing the effect of irregular or temporary price changes that can impact the CPI – such as the electricity subsidies. For example, the Trimmed Mean CPI was 2.9% for the March quarter (3.3% in the December quarter) whereas the headline CPI was 2.4%, which was unchanged from the December quarter.
In October 2022, the ABS commenced publishing a monthly CPI indicator alongside the quarterly CPI. This monthly CPI indicator provides a more frequent measure of inflation compared to the quarterly CPI.
However, this monthly CPI measure is currently referred to as an indicator only as it utilises around two-thirds of the CPI basket each month rather than the full CPI basket as listed above. The ABS is scheduled to commence publishing a complete monthly CPI from late 2025. Quarterly CPI figures will also continue to be published.
So why is the CPI number so important? Well for two reasons – it provides governments and the Reserve Bank (RBA) with a reliable measure of what consumer prices are doing and secondly it provides a reliable guide as to where the RBA needs to set monetary policy.
For clarification the RBA manages interest rates which is Monetary Policy whereas governments manage spending and taxes, which is Fiscal Policy.
With regards to monetary policy the RBA has a mandate to keep Australia’s CPI (inflation rate) to between 2% and 3%. As inflation started to rise in late 2020 the RBA was however too slow to react which meant that it was on the back foot and had to do a catch up and raise rates quickly in order to bring inflation under control.
Consequently, we saw the RBA make 13 rate increases from the low of 0.10% in March 2022 to the high of 4.35% in November 2023 as it tried to quell the inflationary spurt that saw the CPI increase from 0.7% in the September 2020 quarter to the high of 7.8% in the December 2022 quarter.
As much through political pressure as a conviction that the CPI was on the way down, the RBA undertook its initial rate cut of 0.25% in December 2024 when the headline CPI had fallen to 2.4%.
With the CPI now firmly within the RBA’s target range we expect the next rate cut to occur immediately following the RBA’s upcoming monetary meeting on 19th-20th May.
A rate cut of 0.25% is most likely although we consider there is an outside chance of the cut being 0.50% as the RBA may be getting concerned the Australian dollar’s recent rise to nearly 0.65 against the US dollar could be inflationary.
Looking into the second half of 2025, the US tariffs cloud the issue somewhat as they could increase global inflation which in turn could impact on Australia. But closer to home the Labor government was re-elected on the back of significant spending promises, all of which are likely to drive up prices and could stoke the inflation fire again.
So, whilst we expect the RBA to cut later this month and perhaps once more in or around September, we think caution may then prevail until the CPI consequences of the US tariffs and Labors fiscal stimulus are better understood.
The Federal Election
We expect the majority of Australian’s are totally sick of talking politics after being subjected to an underwhelming campaign by all parties and the post-election media conviction that the drubbing of the Liberal’s represents an existential threat to that Parties survival.
On the former, the campaign was underwhelming because all the major parties did was promise to spend more money without any fiscal or structural change to ready Australia for the next decade.
In other words, a total lack of vision.
On the latter we are not so sure the Liberals are down and out as the polls only reversed from that party having a winning lead in the last six weeks before election day. That hardly indicates rusted on Labor voters so if the Liberals can find some of the innovative thinking that the Howard-Costello era possessed, then they will certainly stand a strong chance in 2028.
As we discussed in last month’s newsletter, Australia has several serious fiscal and structural issues facing it – whether that be rising energy costs, a shrinking manufacturing base, a growing debt and likely growing current account deficit, and a population that largely seems more concerned with sugar hits rather than long term planning.
So, Labor does have the job ahead of itself.
The Share Market – Looking Ahead
In the aftermath of a federal election, it is always useful to consider which market sectors and stocks may benefit most from the policies likely to be enacted. At the same time, we believe Australia will be entering a lower interest rate environment – although as said earlier – perhaps not as low as some pundits assume.
On the latter we see increased market focus being directed towards the property trusts (REIT’s) as investors seek the surety of higher distributions to offset the lower rates that will be available from fixed interest.
At the same time, it is becoming apparent across a number of the property sectors – most notably the commercial office – that because of the significant escalation in construction costs, the building of new office towers is not financially viable given the current property yields.
This creates a real opportunity for REITs in this sector and others similarly affected to grow distributions as well as see the discount between their share valuation and the net tangible asset shrink as the market positively reappraises the sectors upside.
For these reasons, we highlighted Centuria Office as a portfolio opportunity In a previous monthly report and this REIT has performed strongly since that recommendation.
Other REIT’s we are looking at that we believe present a sound investment proposition include:
• Industrial Properties – Centuria Industrial (CIP)
• Alternative Properties – National Storage (NSR)
• Diversified Properties – GPT Group (GPT) and Dexus Property Group (DXS)
• Data Centres/ development – Goodman Group (GMG)
• Portfolio Growth – Cromwell Property Group (CMW)
In terms of which sectors and stocks that may benefit from the second term of the Labor government we are not sure that many of the policies such as the Vehicle Efficient , Medicare Expansion and Energy Transition will have any immediate benefits as they could take some time to be properly implemented.
As a result, rather than speculate we would rather wait and let the dust settle for a period before providing recomendations.
For the overall share market we commented in last month’s newsletter that we thought the sell down had been overdone and as clearer heads prevailed gradual stock re-entry would be a sensible strategy.
This strategy paid off and the rally we have seen – at least across Australian market sectors during April – was almost reminiscent of the month following the bottom of the Covid scare. However, unlike the Covid market bottom, this time around there still remain significant economic head winds such as the slowing US economy and the so-called tariff wars.
For that reason, and the fact that the Australian market has recovered almost all of its losses seen in March, we do suggest some short term caution and some profit taking where considered appropriate.
If you are putting new money into the market then, as with what we suggested last month, gradual entry into stock positions is the best strategy.
In closing this month newsletter I reiterate that we do like feedback – good or bad, so any comments you may have regarding these monthly reports please do not hesitate to pass them on to your financial advisor.
