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, UniSuper's official podcast. My name is Lyndon, and David Colosimo is here with me in the studio. He is UniSuper's Head of Fixed Interest and what I like to call an economist extraordinaire. He's here to keep us in the loop with what's happening in investment markets. He'll be recapping last month. He'll look ahead to this month. David, hello and welcome.
David: Hi, Lyndon, great to be here.
Lyndon: David, we will come to the RBA's interest rate cut a little later in the episode. A lot has happened this month, or last month in fact. Let's start with shares, though, I understand it was a bit of a mixed month there for shares around the world?
David: Yeah, definitely, Lyndon. Regular listeners would know that I tend to focus mainly on the US and Australia. That's because for an Australian investor, they tend to be the two biggest market exposures. In February, both ended the month weaker—US shares were down about 1.5% and Australian shares down more than 4%. So, not huge falls, but in Australia in particular, we haven't seen a month that weak for about two and a half years. It's probably worth mentioning that the next two most important markets—that's Europe and China—they were actually quite strong. European shares were up more than 3% and Chinese shares nearly 2%. As you said, when you look around the globe, actually a bit mixed.
Lyndon: Quite a bit of divergence there, David. I know we've been through reporting season in both Australia and the US—was it reporting season that caused that weakness, some of the stuff that was coming out there or...?
David: Reporting season is definitely a part of it, but I wouldn't want to say that it was the main reason. In the US, actual earnings for the December quarter—they looked in line with what we usually see, but expectations for the March quarter and 2025 as a whole have been revised down more than usual. The outlook looks a bit weaker. It's important to remember that shares in both Australia and the US were sitting at record highs during the month, so that implies some pretty good news is already priced in. It can be hard to beat high expectations.
What we're also seeing, though, is the uncertainty in the confusion caused by the sheer volume of President Trump's policy announcements, especially the ‘on and off again’ nature of the tariff threats. That's also creating some volatility. We're starting to see some concerns about US growth again. There's been some softer economic data—in particular, a lot of the sentiment surveys from consumers and businesses, they've been on the weaker side. The market’s starting to take a bit of notice of that. What I find interesting is, this year, we've actually seen share price moves on Fridays a lot weaker than they've usually been. It's as if the market's nervous about what Trump may announce over the weekend.
Lyndon: Yes, it certainly does feel like a lot has been going on, on that front in particular, David. Back to reporting season for a tick—what sort of themes did you see coming out of that? What were we seeing?
David: As I mentioned, US reporting season was solid. A bit over two thirds of companies beat analyst estimates. That's in line with the normal pattern. It now looks like the US had earnings per share growth of about 14% compared to last year. That's actually very strong. The strongest two sectors were financials and technology. Financials saw strong earnings growth, but on a very weak base from last year, and we saw nearly 30% annual growth across the broader technology sector. If you look at names like Amazon and Nvidia, they had earnings growth of more than 70%.
Lyndon: On the theme of Nvidia—last month we were talking about DeepSeek and AI, did that have any impact on what we were seeing? What was the go there?
David: Well, I think one of the more interesting aspects leading into the reporting season was that you started to see some concern about what might happen to the capital expenditure plans of those big tech companies. They've spent so much on AI in the last few years. Then we had the revelation that a Chinese company, DeepSeek, had created AI models with significantly less investment than the US counterparts. So, there was this speculation that the big US tech companies would cut back on investment spending. But reporting season revealed that, if anything, capital expenditure is only accelerating. If you're looking at Microsoft, Meta, Amazon and Google—their combined investment spending for 2025 is forecast to grow at least 30% this year. That's really good news for a chip producer like Nvidia, which was up another 4% in February. But there's uncertainty around how those other four tech companies will monetise that spending and whether they can maintain their margins. I’d note that while many of them actually had strong earnings growth, all four of those tech companies were down in February. Google and Amazon were the worst—their share prices fell more than 16% and 10% respectively.
Also probably good to point out Tesla. It was very weak, down more than 27% in February. Their global sales numbers and their brand perception are being impacted by some of the recent political activity of their CEO. Given how concentrated the US market is in big tech right now, when you get those kinds of moves, that really dictates the direction of the entire market. But you don't have to look too far, and there were plenty of companies that actually had a good month—energy, healthcare, utilities, consumer staples, those sectors were all higher.
Lyndon: Very good. Let's turn to Australia now, David, because reporting season was happening here as well. How did things finish up here?
David: The pattern of reporting season here was very similar to the US. More companies beat analysts’ estimates and missed them. But the forward-looking earnings estimates were revised down marginally. Given where the valuations are, the bar for results was pretty high. Any misses, even by a small margin, or if we saw any downgrades to the outlook, they were pretty harshly dealt with. If you account for the dividends paid, the return on Australia's two largest sectors (resources and the banks) were down 3.5% and 4.25% respectively.
Defensive stocks were a bit better—companies like Telstra were up 5%, Coles up 2.5%, for example. But just that weakness across the two biggest sectors. If we're looking at banks, of the four major banks, CBA was the only one that reported their half-year financial results, but you do get quarterly updates from the other majors. Although the results of those banks were broadly in line, those elevated valuations made share prices vulnerable, so share prices were down. I think the best example here is Bendigo and Adelaide Bank. Interest rate margins have narrowed sharply, expenses were higher than expected—they were down 21% in February. Having been so strong during 2024, with those banks, the market is now having to come to terms with the likely fall in interest rate margins as the RBA cuts rates.
Finally, on the resources sector, I think costs continue to be an issue—that's putting pressure on cash flows. Dividends are starting to look under a bit of pressure. The biggest story at the moment seems to be Mineral Resources. Their shares were down 35%. They're contending with higher-than-expected capex costs, a slow ramp-up in production volumes from their Onslow mine, and they're doing that while they're carrying very high debt levels.
Lyndon: Alright, so a bit of volatility then, David, in Australia. But you were mentioning before that shares in Europe and China have actually been quite strong this month. What's driving that?
David: I think we can get to the catalysts in a little bit, but I think the most important thing is the context that helps answer that question. For a number of years, US equity markets have been the only game in town. Our listeners may have heard the phrase ‘American exceptionalism’. It reflects the US having had not only a better short-term growth picture compared to the rest of the world, but longer-term prospects as well, driven by American innovation. In this environment, the US market has crept to ever-higher valuations as markets assumed strong earnings growth, while markets like Europe and China languished at much cheaper levels. When bad news is priced in places like China and Europe, it doesn't take much to trigger a reversal, and I think that's really what happened in February.
Lyndon: So, what were those triggers last month?
David: Well, a bit different for each country. In China, we’re starting to see some hope that the housing and consumption environment is improving and also that there's going to be some more fiscal stimulus coming. But mostly, it seems to be revitalised sentiment around the Chinese tech sector since the release of DeepSeek’s AI model, which we spoke about, as you said, last month. Chinese AI seems to be catching up very quickly to the US. President Xi looks to be really encouraging that. While the US definitely still leads the technology frontier, China does have a very good track record at efficiently scaling up new technologies. It looks like that's what's happening here.
Now, when we look at Europe, company trends have been surprisingly strong recently. There's been, I think, a bit of relief that US President Trump hasn't singled out Europe yet on tariffs, although I'm guessing at some point he probably will. The emerging geopolitical situation seems to mean that Europeans are now definitely more likely to spend on defence moving forward. Running up to the German election, I think there was a lot of hope for significant fiscal stimulus from Germany.
Lyndon: Just on Germany, David, last month you were mentioning that the German election was something to look out for. Are you able to bring us up to speed? What happened there and your thoughts on that?
David: So that election was held in the last week of February, and the results really reflect, I think, the polarisation in politics we're seeing across many parts of the world. It seems like the traditional moderate left and right parties, they lost a lot of ground. They had the lowest combined vote share in history, and they were losing votes to the parties on the hard right and the hard left. The centrist parties still carried enough of the vote to form a centrist coalition, but there just doesn't seem to be enough support in the new parliament to release that debt break that would allow a larger fiscal stimulus that Europe desperately needs. There is talk, though, perhaps, of reaching a deal under the existing parliament, so we'll have to see how that plays out.
Lyndon: Okay, David, looking ahead now to March. What have we got coming up?
David: The US Federal Reserve announces the outcome of their next meeting on 19 March. Quite a few members of that Fed committee are signalling that until inflation shows more signs of moderating, or unless growth weakens significantly, they're likely to remain on hold for now. So, no change expected there.
Lyndon: And of course, it wouldn't be an episode of Super Informed Radio without canvassing the Reserve Bank of Australia. What's going on with the RBA?
David: As you mentioned at the start, Lyndon, they did deliver their first rate cut in February. But afterwards, a bit like the US, Governor Michelle Bullock was pretty clear that they'd also like to see further improvement in inflation before following up. They don't meet in March, but the outcome of their next meeting’s on 1 April. That'll be just before we release our next podcast—I'm expecting they'll hold there.
Lyndon: That is April Fool's Day, but I'll just leave that right there. Alright—anything else that you're paying attention to, David, before we wrap up? Let's have some freewheeling thoughts from you!
David: [laughs] I think a lot of focus this month will be on China. They've got their National People's Congress, which starts on 5 March. That runs for around a week, we'll be watching that pretty closely. On that first morning, Chinese Premier Li delivers a document called the Government Work Report—that sets out a series of targets for growth, inflation, fiscal spending, as well as the key policy priorities. It looks like the government are again going to set a target of growth of around 5% for this year. That's going to be difficult to reach given growth headwinds, so I'd expect that we're going to see a signal for a much bigger government deficit and a range of spending initiatives: consumer subsidies, injecting more capital into the banks, and even some local government debt swaps. I think based on what we're seeing in the last month or two, I think we're also going to see a real renewed focus on improving the environment for the private sector, especially the tech sector.
Lyndon: Very good. Alright, I reckon that'll do it for this month. David, as always, thank you so much for being here. We'll see you in—I can't believe I'm about to say this—we'll see you in April!
David: See you then, Lyndon.
Lyndon: And that is it for this episode. Thank you so much for listening. Don't miss out on future UniSuper podcasts—subscribe to us wherever you get your podcasts or check unisuper.com.au/podcasts at the start of each month. Now you might recall I mentioned in last month's episode that Chief Investment Officer John Pearce was about to release his next investment update video—well, that is actually now available, so do go and check that out on our YouTube channel. And why not like and subscribe while you're at it. We are UniSuper, the place where bright minds and passionate people strive to think great and create a future worth retiring for. If you'd like more information about our investments, visit unisuper.com.au. Thank you for joining us. 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.