ASX outlook for 2025: shifting gears from banks to miners

As we enter early December, the S&P/ASX 200 is now up around 12% in 2024, with total returns nearing 15%. This suggests a robust performance for Australian equities, exceeding long-term averages and nearly double the 10-year average. However, these figures only scratch the surface of the broader narrative.

Comparing our local market to the US gives us a different perspective. The S&P 500 has jumped more than 25% in 2024 and printed new all-time highs over 50 times! Put simply, this can be mainly attributed to the different concentration of major equity sectors and the varying stages of the interest rate cycle.

China slowdown and falling commodity prices

Local miners have weighed on the index due to weakness in the Chinese economy and subsequent commodity demand. Iron ore prices have dropped from $145 per tonne at the start of 2024 to currently hovering around $100 as of early December. BHP has declined by around 20%. Lithium prices have also dropped due to reduced demand expectations in the electric vehicle market. Mineral Resources (MIN) is down roughly 50%, while Pilbara Minerals (PLS), the lithium pure play, has fallen by around 40%.

Banks powered higher

Major banks have driven the ASX 200 index higher, with Westpac (WBC) and Commonwealth Bank (CBA) gaining approximately 40% year-to-date. As interest rate cut expectations continue to be deferred and the China slowdown persists, capital has flowed into the finance sector.

Why miners could reclaim the spotlight

Looking ahead to 2025, several factors suggest a rotation from banks to miners could be in play. Key catalysts for this narrative include:

1. China stimulus – The PBOC could go beyond recent fiscal measures by introducing robust monetary policy stimulus to combat slowing growth. Much of the bad news could already be priced in, paving the way for improved confidence.

2. Lithium – Some analysts are calling a price bottom, with consolidation around current levels for some time. While patience may still be required, PLS has finally shed its tag as the most shorted stock on the ASX 200, and the chart is beginning to show possible upside strength.

3. Interest rates – With the rest of the developed world cutting rates due to slowing inflation and growth, Australia could follow suit in 2025, barring a black swan event. Real GDP is slowing, which supports the case for a rate cut before it’s too late. While RBA Governor Michelle Bullock maintains a hawkish stance, downplaying expectations of rate cuts, the economic impact of persistently high interest rates and diverging policy is too significant to ignore.

4. Valuations - By some measures, the price-to-earnings ratios for major banks could be seen as significantly high. For instance, CBA is trading at almost double the valuation of its US counterparts. This could make dividend yields less attractive, so when sentiment shifts, it could shift dramatically.

5. Consumer spending – Recent tax cuts could boost domestic spending, potentially stimulating commodity demand.

Image: Lithium ore falls from a chute onto a stockpile at a facility in Australia.

Challenges ahead

On the flip side, several risks could hinder a mining sector revival:

1. China stimulus scepticism – Recent measures have struggled to inspire confidence in markets.

2. Trump tariffs – Proposed tariffs could dampen global demand for iron ore and other commodities.

3. Lithium demand headwinds – Trump’s proposed elimination of electric vehicle tax credits could reduce EV uptake, putting downward pressure on lithium prices.

4. Hawkish RBA – Rate cut expectations could be delayed further based on economic data releases and the RBA’s hawkish stance. This scenario appears less likely given slowing inflation and weak GDP growth. The RBA could feel pressured to take action and align with major global peers (should they continue to do so) by cutting rates.

Key stocks to watch

Mineral Resources (MIN)

Mineral Resources has had a challenging year, with weaker commodity prices and corporate governance issues. Founder and CEO Chris Ellison has come under scrutiny for questionable business practices, placing further pressure on the stock. However, the fundamentals of the business remain strong. Cost-cutting measures and efficiencies position the company well for when the tide turns.

According to TipRanks, whilst the stock is currently rated a HOLD, the analyst consensus price target sits at $42.64. This represents over 15% upside and a figure that could be revised sharply higher. Just six months ago, the consensus target was in the $70 range.

Pilbara Minerals (PLS)

PLS was the most shorted stock on the ASX 200 for an extended period. However, the market’s attention has now shifted to uranium stocks, with Paladin Energy (PDN) taking the top spot. Short interest can serve as a useful barometer of market expectations and the outlook for individual stocks. The recent shift from lithium to uranium might suggest a change in sentiment towards the lithium sector and foster renewed hopes for a revival.

TipRanks analysts currently rate PLS as a MODERATE BUY, with a price target of $3.08, representing over 23% upside. If lithium demand increases and prices rise, this target could be revised higher.

Final word

For some investors and analysts, banks may be perceived as overvalued, while miners may be seen as undervalued. There are signs suggesting a possible sector rotation in 2025, possibly driven by increased acquisitions as miners utilise their cash to enhance market share and improve cost efficiencies, although risks remain. With Chinese monetary policy stimulus and the prospect of rate cuts, Australian miners could be well-positioned for a strong year ahead.

By Fraser Allan

Fraser Allan serves as the Head of Premium Client Services (Share Investing) at CMC, drawing on 14 years of industry experience. Applying his expertise in sales and private client relationship management, Fraser adeptly serves the needs of our premium clients within CMC Invest.

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