Markets are rallying both at home and abroad. Read below to discover the stocks our investment team favour amidst current global uncertainty and abating trade tensions, and unpack the validity of claims by some investors that we are seeing the end of U.S. exceptionalism.
Market Updates
The Australian sharemarket posted another weekly gain last week with investors cautiously optimistic about global trade resolutions. It was a short week with the S&P/ASX 200 Accumulation index ending up 1.9%, with all sectors generating positive returns, led by Financials (+4.3%), REITs (+3.2%) and Energy (+2.9%). The S&P/ASX Small Ordinaries Accumulation Index increased 1.0% in the week. Gold prices rebounded on Thursday to close out the week relatively flat (-0.2%), up 19.8% for the past three months. Copper gained 3.2% in the week, up 11.2% for the past three months.
U.S. stocks rallied after President Trump signaled that he is willing to reduce tariffs against China and retracted his threats to fire Federal Reserve Chair Jerome Powell. Markets were further supported by some better-than-expected corporate earnings releases, with U.S. large caps (S&P 500) up 7.1%, U.S. small caps (Russell 2000) up 6.4% and the MSCI World (AUD) up 3.8%.
Key watchpoints for the week include quarterly company results, ongoing trade negotiations, the Reserve Bank of Australia’s (RBA) inflation prints (Wednesday), U.S. Treasury refunding announcement which details which government securities the U.S. Treasury will offer for sale in upcoming auctions, plus the Australian federal election this Saturday.
The end of U.S. exceptionalism? Not so fast.
There is a narrative emerging among investors that we are seeing the end of U.S. exceptionalism. The evidence supporting this view is very short-term in nature, with most focusing on weakness in the U.S. dollar (USD), US Treasury bonds and U.S. equities, and arguing that the trifecta points to an unprecedented lack of foreign demand for U.S. assets. We would not go so far. We think that there are many levers that U.S. policy makers can pull to control the situation.
USD swap spreads are deeply negative, indicating either supply-demand imbalance or dislocation in fixed income markets. For background, swaps are instruments for exchanging a future stream of variable interest rate payments for fixed rate payments. The swap rate is the fixed rate that investors would accept in the transaction. The swap spread is the difference between the swap rate and the U.S. Treasury bond yield of the same horizon. Traditionally, swap spreads are positive, reflecting the counterparty credit risk of entering a swap. But if the spread is negative, there is an opportunity for traders to earn a risk-free profit by holding the U.S. Treasury bond, paying the fixed swap rate, and receiving the (higher) floating swap rate. Presumably, if dealers and traders are not making the most of this opportunity, there must be some dysfunction or dislocation in markets stopping them from doing so. We think it is very plausible that broker-dealers in the bond market are struggling to warehouse Treasury bonds on their balance sheets under current capital regulations, leading to pricing dislocations. But this can easily be fixed by relaxing these regulations. Alternatively, clever balance sheet measures from either the Fed or U.S. Treasury could help to lower Treasury yields.
Our modelling suggests that volatility in U.S. Treasury bond yields has much more to do with negative swap spreads than the perceived riskiness of the U.S. relative to the rest of the world. To be sure, we could see in the short-term more volatility in markets as more investors embrace the “end of U.S. exceptionalism” narrative. But we think that ultimately, U.S. policy makers have the tools to manage their bond market and currency. We do not see the present uncertainty as a reason to panic. Rather, we think it is creating some wonderful medium-term opportunities.
Graph 1: USD 10-year swap spread
Stock watch
ResMed Inc.
ResMed Inc. (ASX: RMD) delivered an upbeat quarterly report last week, with earnings slightly ahead of expectations. The highlight beyond headline numbers was that gross margins should continue to expand into next year. Sentiment was further boosted by commentary around tariffs, with management receiving confirmation from the U.S. Customs and Border Protection office that its tariff exemptions under the Nairobi Protocol continues to apply.
Held in: WAM Leaders (ASX: WLE)
Generation Development
Generation Development (ASX: GDG), a leading provider of invest bonds and managed accounts, reported its third quarter update last Thursday where assets under management increased across all investment divisions. Despite most divisions materially beating expectations, the share price retreated on the day as one division came in below consensus estimates. We believe this is a timing issue and that the investment thesis remains intact. Generation Development Group is a defensive company with a strong market position that will continue to benefit from the growth in retirement savings. We have used the pull back as a buying opportunity to increase our holding, with the share price still up almost 100% over a 12 month period.
Held in: WAM Capital (ASX: WAM), WAM Microcap (ASX: WMI), WAM Research (ASX: WAX), and WAM Active (ASX: WAA).
Safran
Safran (PAR: SAF), an international high technology group operating in the aviation, defence and space markets, reported its first quarter 2025 results last Friday ahead of expectations. The company reported sales growth of 16.7% year on year and reiterated its full year 2025 guidance for around 10% revenue growth. Safran has a strong balance sheet and an attractive free cash flow generation outlook, supporting growing shareholder returns including an ongoing multiyear share buyback. Company earnings will continue to benefit from tailwinds in strong air traffic demand and older aircrafts remaining in service for longer.
Held in: WAM Global (ASX: WGB)
Bremick Fasteners (Crescent Capital Partners)
Bremick Fasteners (Crescent Capital Partners), established in 1965, has built a strong reputation as a market-leading manufacturer of high-quality fasteners and industrial supplies. Under the ownership of private equity manager Crescent Capital, Bremick Fasters has continued to take market share and increase earnings, supported by an established distribution network in Australia and New Zealand, an extensive product range and advanced engineering capabilities. WAM Alternative Assets sees further upside for Bremick Fasteners through continued sales growth, product innovation and the potential for strategic acquisitions.
Held in: WAM Alternative Assets (ASX: WMA)
Index returns performance table
National Shareholder Presentation Update
Thank you to everyone who joined us at our recent Shareholder Presentations. We hope you enjoy watching our highlights reel here and a recording of the Sydney Presentation here.
