Key Insights for Navigating the Year Ahead
Discover the latest findings and expert analysis shaping equity investment strategies, with thought leadership on the trends and opportunities for 2025.
Introduction
The Prime Value Equities Investment Team takes a comprehensive look at the performance of equities in 2024 and the anticipated trends shaping the market in 2025. It delves into key drivers behind last year’s strong equity returns, offers a forward-looking perspective on market dynamics and identifies the opportunities and risks investors need to be aware of as they navigate the year ahead.
You can expect insights into the resilience of global and Australian markets, sector-specific valuation trends, and the influence of macroeconomic and geopolitical factors on equity performance. The paper also addresses the emerging role of artificial intelligence, interest rate movements, and the ongoing debate around small cap versus large cap stocks.
With a focus on diversification, long-term growth, and ESG considerations, this thought leadership piece provides a detailed yet accessible analysis for investors looking to build wealth through equities in 2025.
Asset Class Overview
We explore the key highlights and major developments within the equities asset class over the past 12 months, including the macroeconomic, geopolitical, and sector-specific factors that influenced performance in 2024.
2024 was a very strong year for equity returns. Globally, from October 2023, investors became more confident about easing US inflation and potentially lower US interest rates. This confidence continued into 2024. Similarly, the Australian stock market performed well, benefitting from a multiple re-rating despite the absence of lower interest rates.
Much like the past few years, the US continues to lead the way, driving global economic activity. Broadly, the US has several tailwinds at the economic level, the industry level and the company level. We also saw the Australian economy being resilient: labour markets were healthy, and inflation is tentatively starting to ease.
Market Outlook for 2025
An in-depth look at the outlook for the equities market in 2025, focusing on anticipated opportunities and challenges. We explore the macroeconomic trends, regulatory shifts, and geopolitical risks likely to shape the market landscape, offering insights into how these factors may impact performance in the coming year.
The ASX has had two years of consecutive double-digit gains. Since the current share market rally started in October 2023, we have also had limited market drawdowns – in fact, the ASX300 Accumulation Index has only had three negative months since October 2023.
Obviously, the current environment matters, and often gives you the valuation and the starting points to give you an idea what’s attractive and what’s priced in. In such a positive environment, there will be certain sectors that are currently trading on high valuations relative to their histories and warrant some cautions. But as the share market rally potentially broadens out, the outlook for sectors on cheaper valuations will look interesting.
More broadly, we observe that there is currently a wide range of views on economies, markets and political tensions for 2025. This could mean increased volatility compared to 2024, but we find that more volatile markets introduce opportunities more frequently. We will be on the lookout for events or scenarios that could transpire in 2025, particularly for fluctuations that create opportunities in companies that we like.
Our equity portfolios are diversified, with the benefit of our portfolio managers investing through numerous cycles. We believe time in the market is more important than trying to time the market when building long-term wealth. We do this by focussing on finding quality companies with valuation appeal to give us the upside that comes with fundamental investing.
Key Investment Themes and Trends
Key themes and trends expected to define equities in 2025. It also examines how evolving market conditions and investor sentiment may influence demand, providing insights into potential shifts and emerging opportunities over the next 12 months.
Over the years we have observed a number of characteristics about our most successful investments. They typically have strong business models that can generate profitable earnings growth over many periods or cycles. We are excited for 2025, as we see many of these characteristics in our existing investments and in opportunities we expect to emerge in 2025.
Two of the trends we are interested in are the valuation gap between large and small companies, and the unusual concentration of the ASX200 index returns.
The valuation gap between Australian large capitalisation companies (notably selected banks and technology related companies) and smaller capitalisation companies has been persistently large for at least the past three years. As the Australian economy improves into 2025, and the Reserve Bank of Australia moves its stance on interest rates to a more neutral position, the valuation and underperformance gap between large and small ASX companies will potentially close.
2024 was unusual for the concentration of ASX returns. The four major banks plus Macquarie Group account for approximately 26% of the ASX300 Index. As a group, these five companies returned 33.5% in 2024. In contrast, the next largest sector, resources, fell 13.5% in 2024 primarily on the back of pessimism surrounding the Chinese economy.
Opportunities and Risks
Explores the most promising investment opportunities within the equities market, along with the key risks anticipated in 2025, and highlights the strategies to manage risks effectively, ensuring a balanced approach to capitalising on opportunities while mitigating potential challenges.
Artificial intelligence (AI) has been a popular theme through 2024. AI seems to be for real, in the long run – but it’s all about expectations, and it’s hard to gauge current expectations around this theme. Where AI lands in the long term is hard to judge, particularly understanding the trajectory and broadening out of this theme.
Thus far, most investors have focussed on the technology stack. Companies that are most directly involved include selected semi-conductor manufacturers with high-end manufacturing capabilities and some software-related companies. The ASX has also been a beneficiary, albeit with less attention, and largely via the ‘old economy’ industries and infrastructure that help power AI: for example, data centres, energy, and resources, to meet demand for minerals, metals and construction equipment.
We sense the momentum behind the AI theme, and are cautious of the froth that comes with the excitement. Recently, DeepSeek, a Chinese AI firm, announced that it had released an open-source AI model that took only two months and less than US$6 million to create, compared to the billions of dollars invested by US technology companies. This announcement has certainly up-ended expectations, but if DeepSeek represents a game-changing direction in development costs of AI, then it should be beneficial across the economy.
Performance Drivers
Examines the primary factors expected to drive returns in equities and how they align with broader macroeconomic or sectoral trends, providing insight into the alignment between asset-specific performance and larger market dynamics.
Interest rates are falling in key economies globally. The amount and speed of those cuts will impact the overall market and influence how different sectors perform.
With economic growth relatively weak in 2024, structurally growing companies (NB technology) performed strongly while cyclical companies were weaker. Should rate cuts drive accelerating economic growth, we may see a rebound in more cyclically exposed companies.
A new US President is also something to watch given President Trump’s tendency to make significant changes to government policy, particularly in areas like tariffs and tax rates.
Portfolio Positioning
Portfolio positioning to capture potential opportunities and mitigate risks in 2025, highlighting any shifts in strategy compared to previous years.
We are conscious various scenarios may play out in 2025 and have portfolios that should perform well in most of those scenarios.
In practice, this means holding many structurally growing companies that are fairly priced but should continue to grow for many years and compound our capital, while also having some cyclically exposed companies with strong balance sheets that will benefit from an upturn in economic growth.
We are stock pickers rather than top-down macro investors. This means every stock in our portfolio has an attractive investment thesis. This provides confidence that the funds should perform well under most scenarios.
Environmental, Social, and Governance (ESG) Considerations
The role of ESG factors in investment decisions for 2025 and how they influence the long-term outlook of your asset class.
ESG is an important part of our investment process. We have specific sectors that we do not invest in (gambling, armaments, tobacco & pornography).
Most importantly, we take a long-term approach to investing. This means investing in companies that can generate sustainable earnings growth for shareholders. Companies that risk their social license through their operations, or have poor corporate governance, have shown to deliver poor outcomes for shareholders. Just as our investors trust us with their capital, we must be able to trust those who run the businesses in which we invest.
Sector-Specific Insights
We explore the sectors or industries within equities that are expected to outperform or underperform, along with key sector-specific developments highlighted.
We believe small cap equities are well placed to perform in 2025, with interest rate cuts a key catalyst.
The key small cap index (Small Ordinaries) is down on a three-year basis while the large cap index is up 27% over that period. That level of relative performance is extreme and should revert at some point.
Historical Comparisons
This section compares the 2025 outlook to previous years, focusing on volatility, returns, and risk.
Drawing historical comparisons is interesting and very common at this time of year, but in our experience not particularly useful for the equities asset class.
This is due to the variety of companies in which we can invest, and the many variables that can change. However, with rate cuts expected and small caps well positioned to rebound relative to large caps, our portfolios are well positioned for the year ahead.
Key Messages
Equities are the cornerstone of any portfolio, delivering strong long-term returns that drive growth. While short-term volatility may occur, the potential for capital growth far outweighs the risks, making equities a vital ingredient for long-term wealth creation.
As the largest asset class in most superannuation funds, equities are unmatched in their ability to compound capital—offering both income and significant growth over time. They are truly essential for building and preserving wealth for the future.
Meet the Australian Equities Investment Team
ST Wong, Chief Investment Officer, Portfolio Manager
Mike Younger, Portfolio Manager
Richard Ivers, Portfolio Manager
Leanne Pan, Portfolio Manager
Benjamin Mellody, Equities Analyst
To learn more, contact your Prime Value Relationship Manager or call us on (03) 9088 8088 or via email info@primevalue.com.au
Important Disclaimer
This white paper has been prepared by Prime Value Asset Management Limited ACN 080 376 110 & AFSL No. 222055. The information provided in this white paper is general in nature and does not take into account your personal investment objectives, financial situation or needs. It has been prepared as a presentation aid only and is not intended to constitute investment advice or a personal securities recommendation.
This white paper is not a Product Disclosure Statement (PDS) or an offer of units and contains a brief overview of the investment only. It is not for general distribution or third-party reliance or use. While this presentation has been prepared from sources which Prime Value believes to be reliable, Prime Value cannot guarantee its accuracy or completeness and other than as required by law, Prime Value undertakes no obligation to advise of changes or updates to this presentation. Any prospective investor wishing to make an investment in the Prime Value Enhanced Income Fund (ARSN 605 114 323) must obtain and read the relevant PDS (particularly the risk factors discussed) and complete an application form.
Neither Prime Value Asset Management Limited nor its associates or directors, nor any other person, guarantees the success of the Prime Value Funds, the repayment of capital or any particular rate of capital or income return, or makes any representation in relation to the personal taxation consequences of any investor’s investment. Past performance is not an indicator of future performance.