The strong market momentum observed in January took a sharp turn in late February that has
continued into March, reversing earlier gains as investor sentiment shifted from optimism to caution. Uncertainty surrounding global economic policies, particularly the Trump administration’s fiscal agenda and its implications for trade, taxation, and monetary policy, contributed to a pullback in global equities. This has escalated fears that the US economy could be heading for a recession that, if materialised, would have detrimental implications for the global economy.
Market Performance
The Australian share market suffered broad-based declines in February, with the ASX 200 falling 4.2%. Among the hardest-hit sectors were Financials (-5.0%), Energy (-5.8%), and Property Trusts (-6.8%), reflecting concerns over interest rates, commodity prices, and geopolitical risks. However, the Consumer Staples Index posted a positive gain of 1.4%, largely driven by A2 Milk’s strong financial results and an upbeat market response to its future earnings potential.
In commodities, copper rallied 6.8% on the back of improving industrial demand, while iron ore and nickel also recorded gains. However, the energy sector continues to struggle, with thermal coal prices dropping 8.4% to a four-year low due to oversupply driven by record production in China and Indonesia. Uranium prices also slid 8.4% as speculation grew that the U.S. might lift restrictions on Russian nuclear fuel imports.
Interest Rates and Economic Outlook
The Reserve Bank of Australia (RBA) cut interest rates by 0.25% in February, lowering the official cash rate to 4.10%. The decision was prompted by signs that inflationary pressures were easing, although RBA Governor Michele Bullock warned that further cuts should not be taken for granted. Financial markets have priced in multiple additional cuts for 2025, but the RBA has signalled that it will remain data-dependent and cautious in its approach.
Despite low unemployment, productivity in Australia has fallen to a 30-year low, raising concerns about long-term economic growth. Wage pressures continue to mount, and consumer spending remains subdued due to high household debt levels. With a federal election looming, both major political parties have proposed significant fiscal stimulus which, if implemented, would make it more difficult for the RBA to implement further interest rate cuts.
The ASX Reporting Season
The February reporting season provided mixed signals about the corporate earnings environment. While 77% of companies met or exceeded earnings expectations, inflationary cost pressures and weaker consumer demand were common themes. Earnings growth for FY 2025 is expected to average around 4.5%, with some sectors showing more resilience than others.
One notable trend during the reporting season was the increase in share buybacks. Suncorp announced a $4.1 billion capital return from the sale of its bank division to ANZ, while Telstra, Worley, and Graincorp also launched substantial buyback programs. Buybacks remain a divisive issue, as they can be seen as benefiting exiting shareholders rather than rewarding long-term investors through dividends. However, they have become an integral part of capital management strategies for many ASX-listed companies.
Leading on from the reporting season is the payment of the interim dividends. Through late February to April it is estimated that $27 billion will be returned to shareholders, with a large percentage of these dividends fully franked.
The following table shows the interim and final dividend, gross yield and projected earnings growth for this and next financial year for some of our largest companies listed on our stock exchange.
Brambles, CSL, Macquarie and S32 are examples of companies that reported decent earnings growth for the first half and are projected to continue to return above average earnings growth into the 2026 financial year.
It is worth noting that the big 4 banks are projected to show average earnings growth for both this and next financial year. However, profits are expected to flatline in subsequent financial years. After such a strong and unexpected rally in bank share prices (lead by Commonwealth Bank), it does not surprise that bank share prices are now experiencing a correction. Because of bank shares significant weighting on our share market index, this is having a large impact on the headline index falls presently being experienced.
Companies such as BHP, RIO and Woodside are highly dependent on commodity prices for earnings growth and, with continued softness in major commodity prices likely to persist, will likely see a reduction in full year profit over this year and next.
Reporting season highlighted the relative performance of comparable businesses within the same industry. Case in point is Woolworths and Coles. Woolworths used to be the leader in food retail but is now running second to Coles on most financial metrics. Perhaps in recent years the Woolworths board and management became excessively focused on social issues rather than the nuts and bolts of grocery retailing. Hopefully, Woolworths can get back to basics and once again start growing its business for the benefit of both customers and shareholders.
The Share Market – Looking Ahead
Historically, the Australian share market performs best between November and February, tends to correct a little in March as companies go ex-dividend and then rally again into April. May to October is often characterised by increased volatility with an increased chance of negative returns over these months.
Market volatility appears to have come a little earlier this year, as US gyrations ripple across the globe. Our view is that many of Australia’s larger companies that have the most impact on our index have room to give back some recent gains and, in doing so, is healthy for long-term share market returns and market stability. Since the all-time highs experienced in mid-February, our market is currently off 9%. We would view a 15% correction as healthy and, with the momentum of selling currently underway, there appears to be a reasonable likelihood of occurring.
We feel the current market weakness is opening the door for excellent long-term buying opportunities. To this end, if you would like to discuss your portfolio or investment strategy in greater detail, please contact our office.
