Australian Equities as a Near-Term Opportunity: June's Business Conditions Signal a Cyclical Turn

The June 2025 NAB Business Survey delivered a stark message: Australia's economy is stabilizing after a rocky start to the year, with business conditions surging to their highest level in years. This rebound, particularly in manufacturing and retail, is a leading indicator of a broader cyclical recovery. For investors, this signals a compelling entry point for Australian equities, especially in cyclical sectors like industrials, materials, and financials. Here's why—and how to position portfolios accordingly.

The chart shows Australia's manufacturing PMI rebounding to 51.0 and services PMI rising to 51.3, both above the 50 expansion threshold. The composite PMI hit 51.2, marking a clear turn from stagnation.

The Case for a Cyclical Turn: June's Data as a Leading Indicator

The June NAB survey revealed a +9 business conditions index, a sharp jump from May's 0 and well above the long-term average of +6. Manufacturing and retail sectors, which had struggled in May, led the rebound. Trading conditions and profitability surged by 10 and 8 points, respectively, while employment improved. Even retail—a perennial laggard—showed unexpected resilience, suggesting consumers are adapting to higher interest rates and lower inflation.

Crucially, the data hints at synchronicity across sectors. Services industries like finance and construction maintained elevated conditions, while construction's confidence hit a record high. Capacity utilization hit 83.3%, indicating robust demand. While input costs remain elevated, final product price growth slowed to 0.6%—the lowest since early 2023. This suggests firms are absorbing cost pressures rather than raising prices, a positive sign for margins if demand holds.

Global Context: Australia's Recovery Ahead of the Curve

The U.S. and Japan are growing, but Europe is stuck in neutral. The June PMI data tells the story:
- U.S. Manufacturing PMI hit 52.9, driven by export orders and hiring, but input costs are rising.
- Eurozone manufacturing remains in contraction (49.4), with weak demand and falling prices.
- Japan's manufacturing PMI expanded to 50.4 after years of stagnation, while Australia's composite PMI rose to 51.2.

Australia's recovery is happening at a time when global peers face headwinds. The U.S. is overstimulating, Europe is stuck, and Japan is limping forward. Australia's mix of modest inflation, improving business confidence, and a diversified economy (reliant on commodities and services) positions it to outperform.

Sector Spotlight: Where to Bet on the Recovery

Materials: Critical Minerals and Gold Lead the Way

The June Resources and Energy Quarterly (REQ) shows a stark divide in Australia's commodity sectors:
- Gold and copper are booming. Gold export earnings will hit $56 billion in 2025–26, while copper rises to $18.2 billion by 2026–27, fueled by EV demand.
- Critical minerals (uranium, lithium, rare earths) are also growing, with export earnings projected to jump from $1.7 billion to $4.8 billion by 2026–27.

Meanwhile, traditional exports like iron ore and thermal coal face declines as China's demand wanes. Investors should focus on miners exposed to high-margin, growth-oriented commodities—not the old-school iron ore giants.

Industrials: Navigating Cost Pressures for Growth

The industrials sector faces headwinds:
- Input costs, especially energy, remain elevated, squeezing margins.
- Private investment has stalled, with capital spending down 0.1% in Q1 2025.

But opportunities exist:
- EV supply chains (e.g., lithium, nickel) and construction materials (driven by high confidence in the sector) are bright spots.
- Companies with exposure to domestic demand (e.g., infrastructure, housing) or global EV trends could thrive.

Financials: Stable, but Underappreciated

Financials are often overlooked, but they're resilient:
- The sector's gross operating surplus rose 1.8% in Q4 2024, supported by strong deposit and loan growth.
- Household savings are up, and mortgage demand remains robust despite high rates.

Financials are a defensive play in a recovery, but their balance sheets are healthier than in past cycles.

Tactical Overweights: Stocks to Watch

• Materials: S&P/ASX 300 Materials Index (ASX:MAT) is up 8% YTD. Target miners like Newcrest Mining (gold) and OZ Minerals (copper, lithium).
• Industrials: Focus on Broadspectrum (construction) and Worley (engineering, EV infrastructure).
• Financials: Commonwealth Bank (CBA) and Westpac benefit from stable deposits and loan growth.

Risk Factors and Timing

• U.S. Tariffs: A July 9 deadline looms. If resolved, industrials could see a boost; if not, expect volatility.
• Global Growth: If the U.S. or Europe falter, Australia's rebound could stall.
• Interest Rates: The RBA's next move is unclear. A cut by year-end could lift equities, but inflation risks linger.

Final Take: Buy the Dip, Target Cyclicals

Australia's June business data is a buy signal for cyclical stocks. The recovery is nascent but synchronized across sectors, and valuations remain attractive compared to global peers. Tactical overweights in materials and industrials, paired with defensive financials, offer a balanced bet on the rebound.

Investors should act now—before the market catches up to the data.