Investment update with John Pearce – February 2025

Hello, and welcome to this investment update. My name is John Pearce, Chief Investment Officer.

Today, I'd like to quickly recap on 2024 and talk about the market returns last year. I’ll then move on to the current, and talk about what and who are moving markets. And finally, we'll get the crystal ball out and take a quick look at 2025.

Here are the market moves for 2024. If you are running a diversified strategy, as most super funds do, here's the optimal strategy. Firstly, you have to be overweight growth assets versus defensive assets. Secondly, international assets performed much better than Australian assets, and particularly US tech—that was the place to be. And finally, within growth assets, it was much better to have listed assets rather than unlisted assets, and you can see the performance of direct property in particular was quite poor.

Image 1: A table showing 2024 market performance for the 12 months to 31 December. International shares returned 30.5% and Australian shares returned 11.4%; both are growth options. Unlisted property returned -5.9%, whilst unlisted infrastructure returned 9.1%; both are unlisted options. Global bonds returned 2.2%, and Cash returned 4.5%; both are defensive options.

With that as a background, it should come as no surprise that our two best-performing options were Global Companies in Asia, and our International Shares option, both recording returns of well in excess of 20%.1 So a terrific year for both those options.

Sticking with performance, I'd like to quickly talk about our performance relative to our peers in the industry. This sort of stuff gets a lot of media attention, so I thought it'd be worthwhile highlighting a few points. On this graph here, we have about 180 bars, and that represents the one-year performance of all the balanced funds in the superannuation industry. I know that it's only one-year numbers, but the media does focus a lot on that timeframe.

What do we notice about this? Firstly, our Balanced option—which is our default option, it’s our biggest option—performed better than the average. So that's a tick. Our Sustainable Balanced option was particularly strong, and why? Back to the other table. A heavy weighting to listed assets—as a matter of fact, a very small weighting to unlisted—and most importantly, a heavy weighting to US tech. So that held it in very good stead.

What about those green bars? Those green bars seem to be dominating the top of the league table. That's index funds. Why have index funds performed so well? No unlisted assets. So basically, if you're an index fund, you're capturing the full move in the market, and markets have had a very strong, sharp rally, and therefore, they've been outperforming.

Image 2: A graph showing the one-year performance of 180 Balanced funds. Blue bars represent UniSuper’s Sustainable Balanced and Balanced investment options, with the Sustainable Balanced option towards the top of the graph returning 15.2% and the Balanced option returning above average with 11.7%. Green bars represent index funds. Grey bars represent all other funds.

We have seen some movement in the market towards index funds with people switching, and you might even be contemplating such a move yourself—after all, they are cheaper, remember—but this performance you’re seeing, it's after fees. If you're contemplating a move, bear in mind that it's not always like this. And in fact, if you look at the 10-year numbers, you'll see that our Balanced and Sustainable Balanced options returns are well and truly in the top quartile of all those returns. And when it comes to superannuation, we think a 10-year timeframe is an appropriate timeframe to look at performance.

Image 3: A graph showing the 10-year performance of 180 Balanced funds. Blue bars represent UniSuper’s Balanced and Sustainable Balanced investment options, which are in the top quartile. Green bars represent index funds. Grey bars represent all other funds.

Let's now move onto the current. What and who are moving markets? Firstly, the what. Have you heard of DeepSeek? Up until two weeks ago, I certainly hadn't. I'm going to oversimplify this, but think about DeepSeek as the Chinese equivalent of ChatGPT, which I'm sure you've all heard about. What's the big deal here? To train DeepSeek, it took the Chinese techies about US$5.6 million. You compare that to ChatGPT. Training ChatGPT took about US$100 million. Meta’s equivalent, which is Llama, about US$500 million. That's enormous.

What was the implication of this? The market was basically saying, “Hey, you guys have wasted a lot of money, and most importantly, you don't have to invest anywhere near as you've been investing in the past to get this sort of performance. So you don't need as much computing power, the Nvidia chips, or the data centre capacity.” This immediately sparked off a massive sell-off in the markets. As a matter of fact, about $1 trillion was wiped off the US market in a single day. About US$600 billion of that was Nvidia. Put that in context, US$600 billion—think about the combined value of all of our major banks. It was more than that.

For example, we know that he's got his new best friend, Elon Musk, looking at ways to extract US$2 trillion in cost savings from government departments.

Where are we now? As it turns out, we’re almost back to where we are before that big announcement. The big tech companies have all reconfirmed that they are going to spend, in aggregate, hundreds of billions of dollars and continue to develop their AI models. So, the party's still going on. Most importantly, from a long-term perspective, if indeed everything is going to get cheaper, this has enormous implications for business, because cheaper technology is the single best way for businesses to improve their productivity. It's a classic case in technology. The benefits are overestimated in the short term, and underestimated in the long term. When it comes to AI, we're in the very early stages of this game, and the game is changing very quickly.

Now let's talk about who is moving markets, and no prizes for guessing—of course, it's Donald Trump. Trump was elected pretty much on the basis that he was going to move fast and break things, so we shouldn't be surprised at, indeed, what he is doing. There doesn't seem to be a day go by when we don't see a flurry of executive orders covering many things, I think yesterday was banning paper straws. Trump is actually announcing some pretty big policy changes, and the market is paying attention to some, but really not paying attention to many others. For example, we know that he's got his new best friend, Elon Musk, looking at ways to extract $2 trillion in cost savings from government departments. The market’s basically saying that Musk has got more chance of landing a rocket on Mars than doing that, so not paying too much attention to that. One thing the market is taking very seriously is Trump's attitude to tariffs, and Trump is on record as saying the most beautiful word in the English dictionary is tariffs. The other saying, of course, is that to anyone with a hammer in his hand, every problem looks like a nail. Trump's hammer is the tariff, and he's indeed weaponising it. Announcements to date, if enacted, would have American tariffs at levels we saw in about 1946, to provide some context. There are two ways this could unfold. First, if indeed this is just a negotiating tool, everything should be fine. Trump gets his way, and tariffs are actually phased out or at least they're not escalated. On the other hand, if we see this ending in a fully blown trade war, it is going to be bad for the economy, bad for business, and bad for share markets. You might recall in 2018, when Trump indeed started a trade war with China, markets sold off about 20%. Let's hope there's going to be enough adults in the room to prevent a trade war from eventuating.

Now let’s look at 2025 and get the crystal ball out. Firstly, can history potentially give us a guide? It depends on what you're looking for. For those of you who are superstitious, it's the year of the snake. That's a bad omen, because the year of the snake actually has delivered the worst outcomes.

Image 4: A graph showing the average annual change in the S&P500 index based on zodiac signs. ‘Horse’ and ‘Snake’ are the only signs that are negative.

Don't despair—it’s 2025, and it turns out that if we go through history, the fifth year of every decade, on average, produces the best returns.

Image 5: A bar graph displaying the S&P500 index performance based on the year of the decade. The fifth year of the decade is shown to provide the highest performance.

What I urge you to do is don't take either of those particularly seriously, they're just fun facts. We do often get commentators talking about these things—I would discard them.

Facts of history that I will take into account, though, are represented in this histogram. Now, this histogram—we're capturing here about 150 years of returns, and what do we know about 2023 and 2024? They were fantastic years—well to the right of that histogram, returns of in excess of 20%. It's very rare that you get three consecutive years in excess of 20% returns.

Image 6: A histogram of the last 151 years of S&P500 returns. Returns for 2023 and 2024 are shown to have exceeded 20%. A question mark remains on where 2025 will land.

In fact, in recent history, it's only happened once in the 90s when the world was recovering from quite a deep recession. Odds are that we are going to have a flat year, and if you look at this graph, indeed, in bull runs through history, the third year tends to be quite subdued.

Image 7: A graph showing average bull market returns over the last 50 years. Historically, third-year returns have been the lowest.

And intuitively, that makes sense, particularly when you think of valuations—they're looking a bit expensive. If you think about what we call ‘price earnings multiples’—I won't get into it, but on that metric—the US market is trading at about a 20% premium. 20% expensive relative to its history. The Aussie market—less expensive, but still about 10% premium to its historical average. So, a bit on the expensive side, but I wouldn't say bubble territory.

Are there signs of bubbles? Yes, I think there are, and I look no further than the cryptocurrency market. We have some popular cryptocurrencies. Right at the top, we have Dogecoin, market value of around US$40 billion—and bear in mind, the founders of Dogecoin readily admit that it was set up as a joke. Trump and Melania getting in on the act and cashing in on their fame with some very expensive meme coins there. And finally, I'll let you read those two for yourself—you've got coins, market value worth hundreds of millions of dollars.

Image 8: A table showing several meme coins and their total market value. Dogecoin: US$39.07 billion. Trump: US$3.74 billion. Melania: US$731 million. Pudgy Penguins: US$685 million. Fartcoin: US$469 million.

To me, this is clearly a sign of irrational exuberance. I am occasionally told that crypto is here to stay, it's the way of the future, don't be a dinosaur, get with the program. Frankly, if you look at that, I think it's more of a joke that's just gone too far, and our members' life savings will not be going anywhere near cryptocurrency investments.

In conclusion, we've had a couple of very good years so it wouldn't surprise me at all to see this year being relatively flat. In fact, I wouldn't discount the possibility of a 10% or even a greater correction in markets. But that's only one year, and we invest over the long term. And over the long term, I'm pretty confident about the state of the global economy. Inflation is behaving itself. Employment remains strong. The tech revolution continues. So indeed, if we do get that correction, UniSuper will be using it as a buying opportunity. We've got plenty of cash, and we intend to load up on assets when the price is right.

Thank you very much for listening.

This video provides general information and may include general advice. It doesn’t take into account your financial situation, needs or objectives. Consider your situation before making financial decisions, because we haven’t, as well as the PDS and TMD relevant to you at unisuper.com.au/pds, and whether to consult a qualified financial adviser. Past performance isn’t an indicator of future performance. Information is current as at 12 February 2025. Comments on the companies we invest in aren’t intended as a recommendation of those companies for inclusion in personal portfolios. Holdings are current as at 31 December 2024 and are subject to change without notice. Figures sourced from the relevant SuperRatings Pty Ltd FCRS or PCRS index December 2024, released 20 January 2025, and without taking into account subsequent revisions. Prepared by UniSuper Management Pty Ltd (ABN 91 006 961 799, AFSL No. 235907) on behalf of UniSuper Limited(ABN 54 006 027 121) the trustee of UniSuper (ABN 91 385 943 850, AFSL No.492806) the fund.