Disclaimer: What you're about to read is of a general nature and doesn't take into account your personal financial situation, needs or objectives. We recommend you seek financial advice before making any decisions about your super and consider the relevant UniSuper PDS and TMD.
Lyndon: Hello, this is Super Informed Radio, the official UniSuper podcast. My name is Lyndon and I think it's fair to say quite a bit has happened since our last podcast at the beginning of December in 2024. If you are a regular listener, you will be aware that in this podcast we tap UniSuper's Head of Fixed Interest, David Colosimo, to bring us up to speed on what's been happening in financial markets and what he thinks could be on the horizon. And if you're a new listener—welcome! You are in for an absolute treat. David is here with me in the studio. David, welcome back for 2025.
David: Thanks, Lyndon. Welcome back to you.
Lyndon: They say a week is a long time in politics, David, but two months in between podcasts does feel like an eternity.
David: Yeah, a lot happens in financial markets in two months. It does feel a bit like dog years sometimes.
Lyndon: In the last couple of weeks alone, David, I can list off a potential interest rate cut, there was the big dive in the share price of Nvidia, which is a company that you mention pretty much every episode—and of course, all of a sudden now the spectre of a trade war seems to be looming. I'm super keen to hear what you've got in store for us, but before we get to that, how about a quick recap on how 2024 finished up? How did we go?
David: Things actually were quite weak as we headed into the end of the year—Australian shares were down a bit over 3%, US shares down 2.5% in December. On the face of it, a down month, though not disastrous. I'd note, though, in the case of the US in particular, it actually felt a lot weaker at the time. The market was boosted a little bit by the strength in a couple of the Magnificent Seven companies—so the likes of Apple, Google, Tesla, for example. Given how big they are, they do tend to boost the overall market. But if you look at the equal weight index, which is a much better indication of the breadth, that was down 6.5% in December, so a much bigger drop. It did feel a lot weaker than the headline number.
Lyndon: So a bit weaker for shares, David—what about bonds? We often hear from you on bonds, how did they go?
David: Bond yields were up in December and that actually drove a lot of the weakness that we were seeing. Towards the end of the year, the US economic data suggested growth was a bit stronger, inflation a little bit more persistent, and the market came to the view that the scope for further Fed rate cuts was disappearing very quickly. US bond yields were up nearly half a per cent and a quick move like that—throwing in some uncertainty from President Trump's policy announcements—that helps to drive the market lower.
Lyndon: The kind of weak-ish December didn't put too much of a dampener on returns for the year, did it, David? Because the year was pretty good overall, wasn’t it?
David: A very good return, particularly in the US. They had total returns of about 25% in 2024, so that's actually a great year. A big part of that—we spoke about it a lot last year—was the tech sector, but really a number of sectors did very well. In Australia, we had returns of about 11.5%. So weaker, but still also a good year. I think the difference for Australia was definitely the resources sector. That lost about 15%, and it's such a big part of the Australian market that that dragged down the rest of the market as well.
Lyndon: Turning to January then, David, a good start to 2025. You were saying before though, it could actually have even been better. What was the deal there?
David: US shares were up a bit under 3% for the month—but a bit of a mirror image with December in that this time, it was dragged down by some big losses in the two biggest stocks. Apple was down 6% and Nvidia down 11%. Australia fared even better than the US, Australian shares were up 4.5%. Even resources—which as I mentioned had a tough 2024—they were up more than 3.5%, so very strong in Australia. After the weakness that we saw in December, it did seem like we were set up for a recovery. Ultimately the US economy is holding up pretty well and the markets seem to feel more comfortable about the Trump presidency again. Some better inflation data also helped to boost confidence.
Lyndon: I am keen to hear a little bit more about Nvidia if that's alright, David, because I reckon our listeners will have been hearing quite a bit about them, and about DeepSeek as well, for that matter. That was all quite a shock.
David: Let me provide some context there. When we think back, AI was definitely the biggest investment theme of 2024. Most of the earnings upgrades over that time were from those big tech companies. The poster child for the AI theme is, of course, Nvidia. We discussed it quite a lot last year that it's the forefront of the AI boom because it produces the best chips, which are used to build the data centres that support AI. Its sales growth has been very strong—it's up more than 11 times in the past five years. If you look at its PE ratio—before the recent fall, that was more than 30 times, so that implies the market thinks it won't just maintain the strong revenue but actually also continue to increase it. That makes Nvidia very sensitive to any news that disrupts this strong growth picture.
And so along comes DeepSeek’s R1 model and that's exactly the disruption that you're thinking of. It's a pretty good AI model, performs very well. It's from a Chinese company which, given the US export restrictions on chips, should not have had access to Nvidia's best chips. DeepSeek claim they've developed their own model in under two months with 200 people at a cost of less than $10 million, using much less advanced chips. And then a few days later, both Alibaba and ByteDance followed up with their own AI models.
Assuming all of these models have been created with lower quality chips, let's think through what that means. So first of all, I think it's great for the global economy because it means we can use AI at a much cheaper cost. Its use would be more widespread, particularly in emerging economies, and it would just be great for productivity overall. It's probably even good news for the big players in the data centres—so the Microsofts and Amazons of this world—because it greatly reduces the amount of capital investment they need to make to build data centres.
Lyndon: Is that bad news for chip makers though, David?
David: Well, it could be, because ultimately you just don't need as many chips and maybe even lower quality chips. So the biggest market impact on the day after DeepSeek’s announcement was on Nvidia—it was down 17% in one day, which is around $590 billion USD of value loss in a single day. That's the biggest fall in history, more than double the largest previous falls. So to put that in some context for Australian listeners, CBA is the biggest company on the Australian share market. Nvidia lost three and a half CBAs in a single day.
Lyndon: Oof. That is quite the massive hit. What did we see in the days after that, David? Did it rebound or is it still down or…?
David: Well, there was a bit of a recovery, but, it has still been quite volatile over the last couple of days as well.
Lyndon: Okay. Let's turn back to the US market because we are in reporting season there. How are things looking?
David: Well, it’s looking okay. The US market still seems on track to deliver double digit earnings growth and very high margins. So far, about a third of US companies have reported, and more than three quarters of them have beat estimates—though on average, not by that much. The two sectors that have done very well so far are the banks—companies like JP Morgan, Citi, Wells Fargo—they're all up between 11 and 16% in January. And the other sector there is the big technology companies that reported last week still seem to be going very well. Meta, for example, had nearly 50% earnings growth over the past 12 months. It was up more than 17% in January. Although proving that the market doesn't always focus on earnings, Tesla actually had a big miss to its estimates, but the market just seems to be focusing on its growth possibilities through robotaxis and the like. Tesla was up 5% on the day and steady over the month, despite missing on earnings.
Lyndon: Alright, from the US market to Australia, David—how are things looking here?
David: Well it was relatively quiet in Australia in January. Reporting season obviously starts this month. So aside from the quarterly updates from the resource companies and some trading updates from the retailers, the big news was that mining company Rio Tinto had been in merger talks with Glencore. Now, according to the press, these talks ended prior to Christmas. Apparently the likelihood of a merger now is quite low. Rio was actually steady in the month.
Lyndon: Alright David, that wraps up January. Onto this month, being February. Now, you mentioned a minute ago Australian reporting season, so presumably that’s on your radar?
David: Yeah. We are in the lead-up to reporting season. Normally you would tend to see profit downgrades in the lead-up because companies want to avoid big surprises on the day. But we actually haven't seen many downgrades recently, so that's probably a good sign—which shouldn't be surprising, given the Australian economy's been going reasonably well despite the higher interest rates. The big issue, I think, for Australian companies has been the weaker Australian dollar in the last few months. That will be actually very good for companies that earn a lot of revenue offshore.
Lyndon: Yes. Which brings us to interest rates, David—are you maybe able to give us any intel on what we might expect from the RBA in Australia and also the US Fed?
David: Well, the US Fed don't meet again until March. Now, I mentioned before that US inflation had been broadly stronger in recent months. At the most recent meeting in January, they actually decided to pause the rate cutting cycle and hold rates steady. And it looks like they're going to continue doing that for some time. The RBA, they announce their next decision on February 18th. They find themselves in a very different position from the Fed, in that the most recent inflation data was very benign—much lower than the RBA had expected. So it now does look like the RBA should be able to cut rates in February.
Lyndon: Which would be great news for many Australian mortgage holders. David, before we start wrapping up, was there anything else that you wanted to mention?
David: Yeah, we don't often speak about Europe, but there's a federal election coming up in Germany on February 23rd. Now, in the last six months, there's been a really big divergence between the US economy, which remains very strong, and Europe, where growth is actually being very disappointing. So this German election will be quite important to see whether the new government will be able to get rid of the so-called ‘debt break’ that limits government spending in Germany. I think a bit of fiscal stimulus would actually really help to get the European economy going again.
Lyndon: OK and seeing as you’ve semi-strayed into politics there, David, what are your thoughts on what we have seen coming out of the US recently?
David: Well, the Trump presidency has certainly been a source of volatility for the markets in the last couple of months. And I really think it will continue to be so for the next year as well. We still just can't be sure which of his announcements will come to fruition or not. So to me, the big questions are things like how hard is he going to go on tariffs and what retaliation will he face? Will there be a fiscal expansion or contraction? What impact will the deportation program have on inflation? And I guess finally, what is he going to do with the corporate tax rate? He does want to lower it. And if he does so that would really be a huge boost to the earnings of listed companies.
Lyndon: Well, as usual, some interesting times ahead, David, and I for one will be glad to have you on hand to talk us through them. Thank you for being here, and we'll see you next month.
David: See you then, Lyndon.
Lyndon: And that's it—first podcast for 2025 done and dusted. Thank you so much for listening. Before we wrap up, though, UniSuper's Chief Investment Officer John Pearce is due to release his next investment update video late next week. So do head to the UniSuper YouTube channel and subscribe to that so that you don't miss out on that one. And speaking of things not to be missed—don't forget to subscribe to us wherever you get your podcasts so you don't miss out on future episodes. You can also check unisuper.com.au/podcasts at the start of each month.
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Thank you again for listening. We will see you next time and until then—look forward, think great, with UniSuper.
This podcast is general in nature, and it doesn't take into account your financial situation, needs or objectives. So, before you make any decisions about your super, we recommend that you seek financial advice first. Also, make sure you've had a read of the Product Disclosure Statement and the Target Market Determination that's relevant to you. They are all available on our website. It goes without saying that the past performance of any investment options that we talk about isn't indicative of their future performance, and it's worth noting as well that just by talking about certain companies, we aren't endorsing them for you to include in your own portfolio.