Economic Snapshot – August 2025 Update

This article was prepared by Michael Furey, Principal of Delta Research & Advisory, on behalf of HPartners Group.

AUGUST 2025 IN SUMMARY

• Tariffs are back on and big but USA courts have suggested they may be illegal so uncertainty reigns supreme and sharemarkets continue their strength on artificial intelligence capital expenditure.

• With the exception of Oil and Emerging Markets, all major asset classes and sub-asset classes produced positive returns over August whilst reporting season in both Australia and USA produced both strong and weak results.

• Looking ahead whilst cash rates are expected to decline, we continue to believe riskier markets will increase in volatility as weaker global economic data is likely for the second half of 2025. As shown on pages 4 of this report, USA sharemarket valuations continue amongst the highest this century and may influence a bearish outlook for many investors, and this could be supported particularly if tariffs are ultimately deemed illegal by the Supreme court. 

• Our core investment message today is to maintain diversification, focus on the long term, and regularly rebalance. Major risks continue to lie with expensive sharemarkets (irrespective of artificial intelligence confidence and the prospect of illegal tariffs), including large companies of the USA, and we continue to favour quality (i.e. good profitability) and value (i.e. “cheap”) styles for long term investments in shares. Quality bonds are preferred as higher yielding below-investment grade bonds provide a historically low premium.

Small Caps show recently rare and best performance in August

WHAT HAPPENED LAST MONTH?

Markets & Economy

• August provided a few spots of higher volatility across Australian and USA sharemarkets as reporting season produced the usual combination of different companies beating and not beating market expectations of annual profits. Overall, in Australia and around the world the current optimistic trend across sharemarkets continued with Australian shares increasing over 3% and global shares (hedged AUD) up over 2%.

• The USA-imposed tariffs dominated the economic-related headlines during August. Some of these included a 50% tariff on Indian and Brazilian imports, 35% on most Canadian imports, 50% on Copper, steel, and aluminium, and a 25% tariff on automobiles and auto-parts.
  Almost every country receive tariffs at rates between 25% and 40%. Chinese goods are currently charged a 30% tariff and this is due to increase in November, depending on negotiations.

• As mentioned previously, tariffs are simultaneously inflationary and economically damaging. The Yale Budget lab expect the tariff rate to be around 17% which is the highest since 1935, price levels are expected to increase around 1.7% in the short run which is a household income loss of round $2,300pa, economic growth is expected to be around 0.5% lower each year than it otherwise would have been. Unemployment is expected to increase around 0.3%.

• Despite this bad news, Artificial Intelligence capital expenditure appears to have contributed to some of the sharemarket optimism as well as keeping economic growth potentially strong.

• Fixed Interest markets produced 0.33% for the Australian market and 0.49% for Global markets. These are relatively stable results as bond markets failed to show much volatility. The RBA reduced its rate another 25bps as widely expected and is now at 3.6%.

Outlook

• Strong sharemarkets have kept the US Sharemarket at high valuations. As reported last month, they are heading towards the pre-correction 2021 levels and are near the highest valuations this century. Other markets, including Australia appear fully valued, although Europe, Japan and Emerging Markets appear somewhat fairly valued.

• Whilst US employment data has shown weakness, the full effect of tariffs won’t be seen for a little while yet as the first full quarter of tariffs is not complete until 30 September. Artificial Intelligence capital expenditure appears to be the growth engine for now.

• Inflation in Australia reduced to 2.1% in the June quarter and current pricing suggests the Reserve Bank of Australia will probably only produce one more 25bps rate cut in 2025 as economic data has been stronger than previously expected. With the USA starting to produce weaker data, like unemployment, there is expected to be a 25 bps rate reduction during September, and that is despite the inflationary effects expected from tariffs.

• Overall, the general portfolio preferences are unchanged and centres on diversification. Volatile markets are likely to continue, and diversification continues to be essential in this environment, whether shares, bonds, real assets, as well as across regions and broader asset class levels. Over the long-term, we believe valuation matters and this continues to be another central theme for investment today.

Major Market Indicators

Source: Morningstar, Trading Economics, Reserve Bank of Australia

SELECTED MARKET RETURNS IN AUD – 12 MONTHS TO 31 AUGUST 2025

Source: Morningstar

REGIONAL MARKET EQUITY VALUATIONS

Source: Source: Delta Research and Advisory , MSCI