Rudi’s View: Captive & Uncomfortable

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Captive & Uncomfortable

By Rudi Filapek-Vandyck, Editor

Between now and April 2, financial markets are likely to remain captive to whatever comes out of the Trump White House.

Reciprocal tariffs? Universal, but with flexibility? No exceptions, except for some?

There are still many variations possible and the general mood can swing on a daily basis in accordance with the latest political signals thrown into the public arena.

After the initial draw down, which pulled US indices -10% or more off their all-time record highs, with Australian indices not far behind, the general mood has becalmed, allowing technically oversold equities to bounce back somewhat.

This happens partially because many investors still believe those tariffs will not be put in place. They are a negotiating tactic, or so goes the narrative. Others will tell us even if tariffs will be put in place, they won’t be permanent.

Transitory’s Back

All of a sudden the term ‘transitory’ has found its place back in financial market’s lexicon, also including the Federal Reserve.

Chair Jerome Powell indicated last week the Fed is prepared to look through higher inflation numbers as long as they are solely related to US import tariffs, and thus temporary, or transitory, i.e. such an occurrence can be ignored as far as central bank policy decisions are concerned.

Powell’s communications with markets have contributed to the aforementioned ‘bounce’ as nervous and spooked investors welcomed the message from the world’s most powerful central bank it stands ready to provide support in case things do get hairy after April 2.

Financial markets like being supported, be it by the Fed or otherwise, but the key question remains: how much is the US economy slowing down already on the back of tariff uncertainty?

If It Quacks Like A Duck

Last week, I mentioned how various ‘soft’ economic indicators, including consumer sentiment and business’ capex intentions, are weakening at quite the rapid pace.

Since then, it is increasingly clear the Canadian populace has turned against their aggressively bullying neighbour from the South, cancelling holidays and trips to the US and now also actively boycotting US goods and services.

None of this will push the US economy into a recession, of course, but if you know that Canadians visit New York to the magnitude of one million visitors each year, this can leave quite the negative impact short-term and nothing the Fed can do to quickly provide compensation.

Economists are expecting this rapid deterioration in ‘soft’ data surveys to start showing up in ‘hard’ economic data such as sales, business inventories and consumer spending as more and more forecasts are now leaning towards weaker economic momentum.

Last week added more credibility to such expectations as Nike and FedEx guided investors to rapid deceleration in their respective businesses, following on from Delta Airlines the week prior.

I probably don’t have to spell this out, but the combination of import tariffs, threats or otherwise, ongoing central bank support (that’s an implicit promise) and the damage already done to US economic momentum is turning share markets into a much riskier environment than what we’ve all witnessed over the past 18 months or so.

Probably no coincidence then, some of the smarter minds have been making comparisons to the 2020 covid lockdowns, suggesting universal reciprocal tariffs, if implemented in full, potentially have the same disruptive consequences for global supply chains as what happened back then.

Why then are markets not selling off more?

My best guesses are:

-there is still a lot of disbelief among investors, even though this US administration has put a lot of effort into convincing the world it truly is on a mission to reform, to reshape, to destroy and to disrupt, but above all to create a more beneficial environment for Main Street, longer-term, and Wall Street will simply have to take it on the chin, for now.

-there are still so many possibilities and alternative scenarios possible, hence many investors prefer to sit on their hands and wait for more clarity to reveal itself.

-in terms of the damage done, that’s really a matter of where we look and what to make of it. Between mid-February and mid-March, the S&P500 fell by -10%, which doesn’t seem like such a big deal given that occurred off historically high multiples and is measured off the record all-time high.

Growth stocks on the Nasdaq fell by more, no surprise there, while the Small Cap S&P600 lost -16% and the midcap S&P400 -13%. The Russell2000 is off some -19% since November.

At face value, those are already sizeable retreats for what remains in essence a threat that is not yet certain and undecided in nature.

Add the fact many investors are keeping a brave face (it will be less bad than it seems, they say) plus markets looked technically oversold, and there’s some knee-jerk optimistic news to look forward to, including a more dovish Federal Reserve.

Companies Before Data

There are no such safety valves when it comes to individual punishments. Shares in Delta Airlines lost some -20% post profit warning. Shares in Nike, whose warning about deteriorating consumer demand included non-US markets, are now trading at a five-year low. FedEx shares, which dropped by -11%, are now at a two-year low.

These early warnings from US businesses are not yet leading to downward revisions for forecasts generally, which, some commentators have suggested, is still supporting US equities. With valuations still above historical averages, this remains a potential point of concern for US markets generally.

In Australia, key indices only fared slightly better with the ASX still some -8% below where it was in the middle of last month.

The Risk-Off environment has been absolutely devastating for companies that added further negative news. Mineral Resources ((MIN)) shares are now some -67% weaker than in March last year. Johns Lyng ((JLG)) shares lost more than -35% year-to-date in 2025. The damage is far greater for Coronado Global Resources ((CRN)).

Risk-Off has equally acted like Kryptonite for local Growth favourites on high multiples, including for WiseTech Global ((WTC)), Pro Medicus ((PME)), and Goodman Group ((GMG)), not to mention some of their smaller brethren.

The key question for local investors is whether and by how much the slowing and the interruptions in the US will have an impact on ASX-listed companies. This is not an unimportant matter as most of the local success stories listed on the Australian bourse have build up a sizeable footprint in North America.

This applies to all of Amcor ((AMC)), Aristocrat Leisure ((ALL)), BlueScope Steel ((BSL)), Car Group ((CAR)), Cochlear ((COH)), CSL ((CSL)), Macquarie Group ((MQG)), Pro Medicus ((PME)), QBE Insurance ((QBE)), ResMed ((RMD)), WiseTech Global ((WTC)) and many more smaller peers.

A reminder to investors: US operations were often quoted as the main key disappointment during the recent February reporting season, together with New Zealand and Victoria in Australia.

Interestingly, James Hardie ((JHX)) has just announced the acquisition of NYSE-listed Azek Co for US$8.75bn and its shares dived -14% on the announcement despite management declaring both entities are unaffected by threats from tariffs. The deal is still seen as dilutive for return in the short term.

One company that equally springs to mind is Brambles ((BXB)), whose defensive characteristics are lauded by many in face of a generally more risk averse environment. But how much of disruption awaits its US pallets operation in case Canada and the Trump administration play hardball for longer?

Nobody knows, but without any concrete indications there’s no incentive to start selling the shares either. This is also why the relative calm on markets this week could easily turn into a misleading indicator for what April (and beyond) might look like.

On a purely simplistic knee-jerk assessment of nil US exposure, those defensive characteristics of local REITs, Telstra ((TLS)) and supermarket operators Coles Group ((COL)), Woolworths Group ((WOW)) and Metcash ((MTS)) look a lot more attractive than before.

The same can be said of locally-oriented fast-growing companies such as Aussie Broadband ((ABB)) and Superloop ((SLC)), though I would argue even the likes of NextDC ((NXT)), TechOne ((TNE)) and Xero ((XRO)), to name but a few, should largely escape any damage or interruptions from tariffs or US slowing.

The obvious caveat here is that a prolonged Risk Off environment in case of devastating tariff impacts or a US recession can put valuations under pressure regardless.

The FNArena-Vested Equities All-Weather Model Portfolio is not being swayed by the relative calm that has has descended upon markets. It’s largely driven by indecision, in my humble opinion, offering false comfort to those who seek evidence and confirmation of a durable turn-around.

While the likes of Franklin Templeton keep sending out press releases to convince investors, and the media perhaps, fears of a US recession are overdone and share prices weakening offer plenty of buying opportunities, the risk for this view to be proven wrong in the short- to medium-term is simply too high at this point.

Greed & Fear

As per always, investors should keep an open mind to what can possibly change to risks for the outlook ahead.

Jefferies strategist Christopher Wood, widely known as the author of the Greed & Fear newsletter, recently summed up what can possibly change the direction of markets (in a positive sense):

-a Fed pivot, consisting of both the end of Quantitative Tightening (QT) and renewed Fed rate cuts (multiple)

-the sudden departure of Elon Musk from DOGE and the Trump administration

Yes, that is a rather short list. The abandonment of tariffs would be an unlikely but obvious third option to add.

One concern that is increasingly on investors’ radar, and equally identified by Greed & fear, relates to private equity and private credit following a tremendous boom period post 2008. Those concerns have equally reached Australian shores (see also Count Financial ((CUP)) and Metrics recently).

Lastly, US pain has become the compensating gain for financial markets in Europe and across Emerging Asia. Alas, for Australia, international investors have clearly decided the ASX in 2025 operates closer to New York than it does to London, Berlin or Shanghai.

American Exceptionalism is suffering at the hands of a MAGA-administration.

Sometimes life does beat imagination.

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

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(This story was written on Monday, 24th March, 2025. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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