Opportunities amid caution
The Australian equity market is expected to deliver moderate returns in 2025 as investors navigate external geopolitical pressures and domestic challenges.
There is caution about the policy implications of the new Trump Administration in the United States, but the promise of lower taxes, deregulation, and potentially lower interest rates should support equity markets, notwithstanding valuation concerns on Wall Street.
Domestically, compelling opportunities are emerging, including a potential rebound in the resources sector, valuation dispersion across sectors, and productivity gains driven by AI adoption.
Three things to watch
1. Resources rebound
The resources sector, excluding gold stocks, has significantly underperformed industrials over the past 12–18 months, following earlier outperformance driven by lithium and iron ore prices.
Figure 1: Total Returns - S&P/ASX 300 Resources vs S&P/ASX 300
Source: Factset
Chart takeaway
Over the past 12–18 months, the resources sector (excluding gold stocks) has significantly lagged behind industrials.
This underperformance creates potential for a rebound, supported by stabilising commodity prices and ongoing global demand. The caveat is that underlying commodity prices will be a key driver of performance.
While the threat of tariffs under the new Trump administration poses a risk to the Chinese economy, which is an important market for Australia’s resource sector, this could prove a double-edged sword. A weakening Chinese economy could prompt accelerated stimulus measures from Beijing, which are typically positive for Australian resource stocks. Additionally, countries looking to diversify supply lines for critical minerals may seek out the relative safety of Australian supply. Both factors provide a positive outlook for Australian resource stocks.
Gold performed strongly in 2024, driven by geopolitical uncertainty and concerns about US debt levels. These factors are expected to persist, providing a supportive backdrop for gold companies.
Macquarie Systematic Investment’s (MSI) process will continue to seek the best opportunities within the resources sector, as part of its holistic approach to portfolio construction.
2. Valuation Opportunities
While markets are at or near record highs, significant valuation dispersion within the Australian market presents opportunities. Technology and financial stocks have driven market gains over the past year, but ‘unloved’ stocks in other areas offer attractive pricing relative to their potential. Valuation is rarely useful for timing trades, but it can dictate returns over a longer period.
Figure 2: S&P/ASX 300, 80th percentile Forward One-Year Price-to-Earnings (P/E) Ratio vs 20th percentile Forward One-Year Price-to-Earnings (P/E) Ratio
Source: Factset. Forward One-year Price-to-Earnings (P/E) Ratio refers to the current share price divided by the projected Earnings Per Share (EPS) for the next 12 months.
Chart takeaway
The growing disparity in price-to-earnings (P/E) ratios between the most expensive and the cheapest stocks on the ASX underscores potential opportunities for value-focused investors.
A widening gap in price-to-earnings (PE) ratios between the most expensive and cheapest stocks on the ASX highlights opportunities for value-focused investors seeking ‘unloved stocks’. Macquarie’s systematic approach targets these opportunities as part of its diversified investment process.
3. AI adoption
The adoption of artificial intelligence is reshaping corporate Australia. Major organisations – including banks, insurers, telcos, and retailers – are implementing AI to drive productivity improvements. While AI may not immediately boost revenues, it is expected to lower cost structures, increase margins, and enhance competitiveness.
Adjacent industries, such as data centres, energy providers, and software companies, are also poised to benefit from AI-driven efficiencies. Many of the signals which MSI utilise to identify opportunities, such as earnings sentiment and quality metrics, may be linked to successful AI adoption.
Australian equities bottom line
The Australian equity market is expected to deliver moderate returns in 2025, supported by potential changes in the United States under the incoming Trump Administration. The most compelling opportunities within the Australian market include a potential rebound in the resources sector, significant valuation dispersion across sectors, and productivity gains driven by AI adoption.
More broadly, in our view, Australian equities as an asset class has the potential to offer an attractive investment opportunity in 2025 compared to global peers for the following reasons:
- Valuation and yield: The Australian equity market (S&P/ASX300) is trading at a PE of approximately 20x and a yield of around 3.5%, compared to the US equity market (S&P500) which is trading at a PE of about 26x and yield of 1.3%.
- China stimulus: Australia has optionality on China stimulus measures implemented to boost a weak Chinese economy could have significant tailwinds for Australia.
- Supportive economic backdrop: Australia is expected to benefit from lowering rates in 2025, population growth and a resilient economy.
Benjamin Leung
Head of Systematic Investments
Shamus McCully
Portfolio Manager
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