CFS Market Insights: February 2025

Welcome to CFS Market Insights. To start off with, it's worth recapping on the events of 2025. Particularly as we move into the beginning of Trump's second presidential term. 

As a reminder, we had a significant number of elections in 2024. What really stood out is that every incumbent government was either defeated or had their majority significantly reduced. And what we have seen across many developed economies, is a move to more right-wing populist governments.

This is important because I think we'll see this sort of play out in the Trump presidency. You've seen a general move to focus on nationalism rather than globalism. Focus on domestic tax, productivity, supply chain security, and the movement to focus on individual countries rather than looking at things from a global perspective.

So, what can we expect in the coming months? The first thing to focus on is what the new Trump presidency is likely to mean.

One thing that is interesting is that, with all the presidential announcements on his first day, one that didn't get a lot of notice was that Trump renamed America's highest peak, Denali, to Mount McKinley. And this was in honour of the pro-tariff President William McKinley. And that may be a bit of an indication about the way that Trump is going to think about economic policy going forward.

We have heard quite a lot of strong rhetoric in the first couple of days of the new administration around tariffs, particularly focused on areas like Europe and closer trading nations such as Mexico and Canada. What is perhaps more interesting is that, the focus on China has been less than some people might have expected, and this may suggest that, actually, the new government takes a slightly more pragmatic approach to dealing with a very significant trading partner.

What we do know is that the focus domestically is going to be on tax cuts, deregulation, and also immigration. And whilst that plays well to the Trump base, we do think that there is some risks as we move through the year that the impacts of these policies will be inflationary. 

And that is something that we've been very focused on from an investment perspective, and we've been making some adjustments in our investment portfolios to deal with a potentially higher inflation environment going forward.

While we may not all agree with Trump's policies or those of other new governments around the world, what markets do like is certainty, and the significant number of elections that we saw in 2024 has removed the uncertainty from electoral policies, from many developed economies. And we do think that that provides a sort of stable base for investors to start looking further ahead and have a clear understanding about the way that monetary and fiscal policy could play out.

Closer to home, we obviously are likely to see an election here in Australia, and one of the things that we'll be looking at is the way that particularly fiscal policy plays out and the impact that that could have on investments closer to home.

What we have seen as people have looked into 2025 is a strong focus on the impact of geopolitics. But in recent weeks, we've actually seen the announcement of a ceasefire in Gaza and also some tentative signals that both Russia and Ukraine may be moved towards some form of negotiation. This may mean that, actually, the focus on geopolitics may actually be less of an impact on investment returns going forward than some may have expected.

What we do know is that we've seen two very strong years of investment returns, particularly from equity markets, and we should expect that, over the next two to three years, that investment returns move back to more normal levels of between 6 and 8%, rather than the double-digit returns that we've seen in the last couple of years.

We have been adjusting our investment strategy to reflect what we do think is going to be a lower returning environment. We still think that there's great opportunities for medium term investments, but it's right to think that, actually, in the next year or so, investment returns may move back to more normalised levels than the very strong returns we've seen over the last two years.

Thanks for watching CFS Market Insights. See you next time.