2025 Predictions for the year ahead

We start the new year with the Oracle Investment Management team revealing their predictions for 2025, following the tradition of previous years.

Our projections for the year are not our base case scenarios. Rather, we aim to initiate thoughtful discussions on a range of topics that we may encounter in 2025.

We are excited to share these predictions with you and hope that they will provide valuable insights into what lies ahead in the world of finance and investing.

Prediction 1

The IPO market is revived in 2025

The IPO market has been on life support since the record-breaking post-COVID surge in 2021. According to Dealogic, firms going public in worldwide markets raised just over $600bn in fresh equity. This has fallen in each successive year: $170bn in 2022, $120bn in 2023, and $100bn to the end of October 2024. Could 2025 be the year the market bucks this trend?

To see an IPO revival there needs to be sufficient investor confidence in the market to accept the heightened risk that an IPO poses. Similarly, vendor companies need this confidence to be able to get a listing price that is acceptable to them. This confidence comes from macroeconomic certainty and stability, as well as a positive outlook. Rising rates were certainly a factor in the IPO market shuttering globally, as this caused great uncertainty in markets and reduced valuations investors were willing to pay. Against all odds, the US looks like it may pull off the miracle “soft landing”, and in reducing its Federal Funds Rate, it has already given the market confidence to bid prices of existing stocks, which could create a fertile environment for new listings. If this environment remains stable through the next 4 to 6 months we could see more companies come to market with vendors hoping to cash in on this positive market sentiment.

Prediction 2

The US intervenes in the electricity market as data demand surges

One of the great narratives of the last two years has been the rise of generative artificial intelligence and its accessibility to the consumer. Not only have we seen the rise of large language model chatbots such as ChatGPT to enable conversational text production, but AI assistants are becoming more commonplace to assist with other assignments such as Adobe’s generative fill or text to image, and Microsoft’s co-pilot streamlining mundane and repetitive tasks.

These advances should be great for productivity, but a single AI text query uses 25 times more energy than a Google search. A query to generate an image or video, surely, would consume even more. If AI use continues to grow like it has recently, and there is no reason to expect it won’t, then this is clearly at odds with the world’s climate targets.

Not only this but it could also lead to a demand/supply imbalance. The biggest users are scrambling to secure their own private generation facilities, but these are medium-term projects. In the meantime, to minimise the impact surging corporate demand for energy could have, we could see the US government either impose restrictions such as taxes on corporate energy use or even provide subsidies to households to reduce the impact corporate energy consumption may have on energy prices.

Prediction 3

The founder of Nuclear of Australia becomes a special adviser to the next federal Minister of Business, Energy and Industrial Strategy.

Proudly Australia – Will Shackel, a year 12 student from Brisbane, Queensland, is appointed as Special Advisor on nuclear energy to Australia’s next Federal Minister of Business, Energy and Industrial Strategy. The new Federal department will replace the current Department of Climate Change, Energy, the Environment and Water, which was established on 1 July 2022.

By focusing on long-term planning using reliability, affordability, and sustainability as its cornerstones, not ideology, Australia will be better equipped to advance the energy transition, in which nuclear plays a key role. At the same time, the execution of an Industrial Strategy embraces advanced technologies in aspects such as clean energy and advanced defence systems. Unfortunately, Australia’s domestic manufacturing capacity is generally declining, except in the defence industry and, in time, maybe renewable energy transition.

Will Shackel is the founder of Nuclear for Australia. He launched a petition in 2022 to legalise nuclear energy in Australia, and since launching the organisation, Nuclear for Australia has become the largest nuclear advocacy organisation in Australia. Will has continued his personal advocacy which has included providing evidence to a Senate Committee in Canberra, visiting COP28 where he interviewed Emmanuel Macron and frequent media appearances.

Prediction 4

Consolidation in the world of accounting software.

Sage in its latest annual report forecasted the size of its addressable market at £35bn. It is based on the number of organisations with up to 2,000 employees, in the 19 countries where the company operates. Xero in its latest interim report presented its addressable market in accounting and payroll as A$40bn, with A$59bn in Payments. It represents the addressable markets in Australia and New Zealand (ANZ), the UK and the US (including Canada).

What about a merger of equals between Sage and Xero? It could be the answer to compete for business in the US, the home of Intuit and a population of 35.3m small & medium-size businesses (SMBs). Although Xero does not have a substantial business in the US, like it has in AZN, market leadership of the merged business in the UK and AZN implies the growth vector becomes the US, with Sage already deriving 45% of its revenue from North America.

A solid result from Sage recently and the stock price shot up almost one-third, translating to a market capitalisation of U$16.9bn, marginally below the current market capitalisation of Xero, at U$17.4bn. “MergeCo” is a company with a market capitalisation of around U$35bn and annualised revenue of just over U$4bn. Although only 25% the size of Intuit in terms of revenue, it consolidates the position of MergeCo as the number two player in global accounting & payroll software for the SMB market.

If we look at the Rule of 40, Xero achieved a ratio of 43.9% as per most recent interim results, and the combination of Sage and Xero will deliver a greater Rule of 40 for both shareholders of Sage and Xero in “MergeCo”. Both the research & development (R&D) and sales & marketing (S&M) expense ratios on a combined basis will normalise to about 20% in R&D and 35% in S&M, implying very strong growth in profits and cash flows.

Prediction 5

2025 – Finally Small Caps will thrive

The Australian small cap index, the ASX Small Ordinaries, will outperform the ASX200 index.

Being a small-cap manager it is no surprise that we expect our corner of the market to outperform. However, I believe there are fundamental factors in play that will lead to the outperformance of small companies over large companies in 2025.

We have seen at the end of 2024, the Small Ordinaries enjoying success over its big brother the ASX200. At the time of writing the Small Ordinaries has returned 11.8% vs 6.4% for the ASX200, over the previous 3-month timeframe. This compares to the 12-month period, where the Small Ords has underperformed the ASX200 by 3.4%.

So, why do we think 2025 will be favourable for Australian smaller companies?

We predicted that 2024 would be the year of the small-cap, but as history shows, we were early on our call. Our reasonings around why small companies will outperform haven’t changed and the catalysts the market needs to see for this to happen are now likely to occur in 2025.

These catalysts are:

• Falling inflation and RBA interest rate cuts. While we don’t expect substantial rate cuts from the RBA in 2025, even one or two cuts will see investment flows move to the smaller end of the market. Smaller companies have higher sensitivity to interest rates, so a move either way will lead to the share market reacting. 

• Improving domestic economy. With business investment languishing close to the 1990’s recession level, economic growth has slowed. However, with falling inflation and lower rates, consumer sentiment will improve. As the market is forward looking, investors will start to look at earnings growth in FY26 and FY27. This will provide a positive catalyst for the ASX small cap universe. 

• The banks! The banks have been on a tearaway run in 2024 despite profits going nowhere. This is unlikely to occur again in 2025, as earnings are still expected to be flat. Interest rate cuts are also a headwind for the sector. Given the banks have such a large weighting in the ASX200 index, their performance in 2025 could be a drag on returns for the overall Australian market. Providing the opportunity for the Small Ords to shine.

Prediction 6

New Zealand will rebound

Our neighbours across the ditch have been walking the tightrope of recession for the past two years. This has led New Zealand’s central bank, the RBNZ, to cut rates three times in the past four months.

The latest cut in November was a reduction of 50bps to the NZ cash rate. The RBNZ Governor, Adrian Orr, also signalled that another 50bps is likely at their first meeting in 2025. Orr stated that they expect to reach a neutral rate between 2.50% to 3.50% for the cash rate over the next 12 months. This compares to the 4.25% at the end of 2024.

Such aggressive cutting will provide a boost to the New Zealand economy. Consumers should feel the pressure ease on their budgets and spending will increase. This can lead to higher-than-expected earnings for companies whose main operations are in New Zealand, and the share market will react positively.

Some examples of dual-listed New Zealand companies (listed on the ASX and NZX) that may benefit are Infratril, Fletcher Building & New Zealand Media & Entertainment (NZME).

Prediction 7

ASX/200 to provide double-digit total returns for the third year in a row.

We've long felt that the only value of stock forecasters is to make fortune tellers look good - Warren Buffett.

For last year, we predicted more than 15% total return for the ASX200. As of this writing in early December, the return YTD was 14.9%. Shall we call this a win? In any case, our Australian Equities Portfolio has crossed the 15% hurdle comfortably YTD, and so we call it a win. However, for 2025, notwithstanding the caveat from Mr Buffett above, we are happy to predict double digit gains. Why? Markets are still way below what we consider fairly valued levels. Most of the market gains have been driven by select sectors like Tech and Financials. Large segments of the markets like Consumer discretionary, Staples, Industrials, Health Care etc are still well below peak profit margins and are still not in growth mode. The rate-cut cycle is also in the early stages globally and is expected to begin in Australia in 2025. However, consensus, as incredible as it may seem, remains pessimistic even after the birth of a new bull nearly 2.5 years ago. We are confident that the market (or at least our portfolio) would continue to climb this wall of worry and call the perma-bears ‘consistent contrarians’ once again.

We’re excited to see how things shape up this year and whether our predictions for 2025 come true! It's always exciting to see the future unfold before our eyes, and we hope to gain a better insight into what's in store for us.

Written by the Oracle Investment Management team

Important information – Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.