In this update, we review the recently completed June quarter, assess the current interest rate landscape, highlight the long-term benefits Australia is deriving from its superannuation system, and share key insights from a fascinating AI conference we recently attended.

June Quarter – Equity markets

Despite US policy uncertainty, global conflicts particularly in the Middle East and continued tariff negotiations equity markets performed strongly in the June quarter. The ASX 200 rose +8.9%, while the US S&P 500 gained +10.6%. Since peaking in February, markets have effectively completed a full cycle in under three months: the NASDAQ fell more than 20% to its April 8 low, before rebounding over 20%.

Technology, the worst-performing sector in Q1, led the rebound with a +28.4% gain. Financials ex-property (+15.8%) also performed well, while Materials (-0.7%) and Utilities (+2.0%) lagged.

Notable contributors included Microsoft (MSFT) up 26%, Commonwealth Bank (CBA) up 22.4%, and Macquarie Bank (MQG) up 18.6%. On the downside, Apple (AAPL) was the biggest drag, falling 11.4%, followed by CSL down 3.9%, and BHP down 3.8%.

U.S Dollar Weakness and it Implications

In the first half of 2025, the U.S. Dollar Index (DXY) declined about 10.8%—its steepest first-half fall since 1973. This trend is supportive of U.S. corporate profits, particularly multinationals, as almost 40% of S&P 500 revenues now come from international markets (up from ~20% in the 1990s). A weaker dollar boosts earnings when foreign revenues are translated back to US dollars. Large U.S. technology firms with substantial international revenues stand to benefit include Apple, Microsoft, Google, and Amazon.

Gold has maintained a strong inverse correlation with the dollar. With structural tailwinds supporting safe haven demand and a weaker dollar, gold is well positioned to serve as a long-term winner in diversified portfolios.

Interest rate cuts into a growing economy has historically led to strong equity market returns

As inflation has cooled sharply in most economies, and Australia’s core inflation moved into the target band, the RBA has followed other central banks in cutting interest rates. The RBA cut rates for a second time this year in May. Its May Statement on Monetary Policy implied up to four more cuts.

Chart 1 – RBA policy decision

Source – FOREX, Westpac

While the Australian economy slowed in the March quarter, employment remains robust with unemployment at 4.1%. Looking at the last 50 years of equity market performance, when these two forces combine (low unemployment and rate cuts), Australian equities have generated an average return of 18.5%. For global equities, the average return was 23.5%.

Chart 2 – Interest rate cuts in a growing economy over the last 50 years.

Source – Bloomberg, Pinnacle

Australia is benefiting from decades of compulsory superannuation.

Australia’s superannuation pool reached $4.2 trillion earlier this year.  With compulsory superannuation now rising to 12% and public scrutiny about the cost of its tax concessions, a new study by ASFA shows that Australia spends less than a third what most OECD countries spend on the aged pension. Australia currently spends around 2.3% of our GDP on the aged pension, but that figure is falling. By 2060, this is projected to fall to just 2%, even as the population ages. Most OECD countries are spending 9% and growing, and they will be above 10% by 2060.

Chart 3 – Projected cost of the age pension and superannuation tax breaks (% of GDP)

Source – Treasury 2023 Intergenerational report

AI Conference Highlights

At the AFR AI Summit, the ambition to make Australia a global AI leader by 2028 was clear. While we are only ~5% into this transformation (per Chief Scientist Tony Haymet), the pace of progress is exceptional. AI has rapidly progressed from research to real-world impact.

Google had a strong presence at the conference and has invested over $1b in Australia in AI. Sovereign AI is for most countries a top 3 priority on par with food security and energy.

We heard from numerous companies about how they are using AI.  Suncorp AI processed 7000 Cyclone Alfred claims, as policy holders paid same day. AI overlaid changing weather patterns with customer information to send out early warnings to people in the cyclone’s path.  Suncorp AI “agents” automatically processed 7000 claims made for food spoilage, as the new systems verified that power had indeed gone out in homes for which claims were being made. Money was sent to customer accounts the same day, previously, that would have taken weeks.

AI identified a new deposit for BHP, with an estimated 1.3 billion tonnes of copper and gold, near Olympic Dam in South Australia. That occurred after drilling data from the 1960s, discounted by miners, was fed into an AI system.

During the quarter Microsoft cloud business Azure grew revenue year on year by 35%.  AI services contributed to 16% points of that growth.  Growth in the cloud is accelerating which is extra ordinary for a business unit this size generating $42.4 billion in revenue during the quarter.

Leveraging Australia’s advantages

Recently the Business Council of Australia produce a research paper titled Australia’s AI agenda.   The Business Council’s Australia’s AI Agenda report highlighted national strengths in biotechnology, agriculture technology, field robotics and mining automation. Despite having only 0.3% of global population, Australia produces 1.6% of AI research output.

OpenAI estimates AI could add $115B to the Australian economy by 2030. Its report claims the financial benefit of AI will be achieved in three main areas: $80 billion annually from productivity improvements, $25 billion from improved output quality, $6 billion from new businesses and $4 billion from new jobs.

Countries with the most data centres have the potential for stronger digital economies and greater technological innovation. Australia built more data centres in 2024 than any country outside the US.  McKinsey estimates that $7trillion in investment in AI infrastructure is needed globally by 2030.  Australia is well positioned with vast land resources, proximity to Asia, enormous potential for cost competitive renewable energy, and large pools of capital (via $4.2T in superannuation) all critical for building, powering and housing the data centres that power AI. At the conference AirTrunk presented stating that 74% of the energy used in their data centres is via renewables and that it will be 100% by 2030..

Chart 4 – Australia built more data centres in 2024 than any country outside the US.

Source – Knight Frank

Australia’s software exports now exceed exports of both copper and aluminium. In 2024, software licensing generated $7.5B, highlighting the sector’s rising global relevance.

Market Prospects

Investors are now expecting the trade war to not be highly destructive in terms of the earnings outlook. In the US it is expected good news is coming in the next six months in the form of Fed rate cuts, fiscal stimulus, deregulation, and lower oil prices.

Many of the leading stocks continue to generate very strong earnings momentum underpinned by longer term secular growth stories. In the US leading stocks such as Microsoft, Apple, Google, Nvidia, Amazon, Mastercard are global platforms, in growth markets, with fee or transactional based revenues, global footprints and millions or even billions of customers. In Australia, although somewhat less geographically diversified, similar examples include Goodman, ResMed, CSL, REA, Brambles, Aristocrat, Carsales, and Wesfarmers.

We continue to hold a balanced portfolio structure across Growth (Information Technology, Logistics, Healthcare, International), Defensives (Consumer Staples, Infrastructure, Gold) and Cyclicals (Resources, select Financials).

For assistance or guidance managing your investment portfolio, contact CIB Private Wealth Director Paul Israel on 02 8274 5807.