Rudi’s View: Share Market Scenarios & Dilemmas

This story features WISETECH GLOBAL LIMITED, and other companies. For more info SHARE ANALYSIS: WTC

The company is included in ASX50, ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

By Rudi Filapek-Vandyck, Editor

Monday’s session on the ASX was expected to be brutal as the US administration shows no signs of backing down from its “reciprocal” import tariffs (note the ” “).

China’s response has been equally forceful, while the European Union seems in no mood to acquiesce either.

Just as the local market was seemingly on the brink of breaking down, capitulating maybe, buy orders started coming in, just like in the old John Wayne movies.

All of a sudden, stocks that were down -10% and more reduced their losses and some –like WiseTech Global ((WTC)) and Car Group ((CAR))– even brought some green back on the market’s screen.

At its low point around 11am, with forced selling and margin calls hitting the market hard, the ASX200 was down nearly -7%, which would mirror the type of days experienced during the covid crisis in 2020. By the closing bell, those losses had been reduced to -4.23%, still the heaviest one-day loss since 2020.

Is this it? Has the local share market now seen its low for the year?

That would be an incredibly bold prediction to make. But we won’t know until we look back with hindsight at some stage later in the year.

What we do know is the US administration is willing to gamble the US economy on getting a “better deal” from the rest of the world and this involves “pain now” for gains later.

I think there are, roughly assessed, three key reasons as to why markets have responded with extreme moves following the April 2 tariff announcements:

-Firstly, the tariffs itself are seemingly put together by a group of mad men, based on illogical calculations, covered by spurious spin and explanations. They don’t seem to offer, at face value, a lot of room to negotiate. Unless one believes this is Trump’s Art of the Deal strategy whereby the first gambit is to go overboard in order to confuse and bedazzle the opposition.

The good news is if this is the strategy, there’s a lot of wiggle room.

-The second reason is closely correlated as many investors, hedge funds included, have been painfully wrong-footed on April 2. Hence, serious portfolio re-adjustments needed to be made. With share prices falling rapidly, margin calls came in and forced selling has taken place.

This is also why gold took a step back whereas its status as a safe haven would suggest otherwise. Sometimes gold is being sold because it’s the only asset that is not de-rating in a hurry.

The not so good news here is this opens up the risk for financial contagion and corporate failures. Underneath the surface of today’s market moves hides a lot of potential for more negative events, in particular since currencies and commodities have equally been on a gigantic rollercoaster.

-The third reason is that tariffs and share market turmoil significantly increase the odds for economic recession, in the US and elsewhere. Global supply chain disruption and extreme uncertainty caused by these tariffs are likely to weigh on sentiment among both consumers and businesses and this makes a loss of economic momentum all but plausible.

Whether it will cause negative economic growth is something we are going to find out from, say, mid-year onwards, so there’s still time. The longer tariffs and uncertainty remain in place, the more likely we will see recessions.

Recessions are seldom good news for equities. Most companies need positive economic momentum to perform for shareholders, while others who don’t are still likely to be de-rated. During Risk Off periods, investors are not willing to pay the same price, no matter how wonderful the business.

These three key factors also neatly highlight the main dilemmas for investors today:

1. Do you think the US President is willing to change course if markets drop deeply enough?
2. Do you think the US strategy is working and soon we will see a flurry of deals being announced that see tariffs being lowered or even nullified?
3. Do you think central banks are ready to intervene when cracks start appearing?
4. Are markets overplaying the likelihood of supply chain disruptions and economic recessions?

Most equity markets, the US and Australia included, started off on quite rich valuations in January, but sharply weaker share prices have most definitely made shares more attractive when judged against a longer term horizon. That’s the easy assessment.

What is more difficult to predict is what will happen in the shorter term?

Here the positive news, potentially, is the extreme volatility that has gripped markets in recent days has made them look technically heavily oversold. While this is not a great timing indicator, it does suggest markets are likely to rally hard into positive news of any kind.

Whether this rally is something to buy or sell into remains dependent on one’s view whether economic recession is on the horizon, or whether economies will only slow down temporarily.

Leaving the many unanswered questions aside about specific tariff impacts and life in an isolationist US market, the choice between recession yes/no or simply slowing economic momentum makes a very big difference in how various shares might perform.

In the most extreme case, a deep recession will impact on Quality and Growth companies through lower multiples, which can force share prices a lot lower still, while cyclical businesses will see their earnings evaporate and thus their share prices could well face near annihilation.

A milder scenario will almost by definition make bargain-hunting a lot easier in today’s market and further downside potential a lot smaller.

The choice differences between these two outcomes feature in the latest strategy updates by UBS and Macquarie.

UBS is the most sanguine about what possibly lays ahead, whereas Macquarie strategists are preparing for a bear market as a result of a forthcoming US economic recession.

Having suffered in many cases share price weakness of -20% and more, UBS strategists suggest there could be opportunity in ASX-listed Quality businesses that are now trading at “reasonable prices”, with the focus specifically on companies that partially derive earnings from the US economy.

Even with earnings downgrades likely to come through, UBS analysts see lower share prices as having already discounted a lot of negative news.

Companies mentioned include obvious Quality stalwarts such as Amcor ((AMC)), Brambles ((BXB)), Cochlear ((COH)), Computershare ((CPU)), CSL ((CSL)), Car Group ((CAR)), James Hardie ((JHX)), Macquarie Group ((MQG)), ResMed ((RMD)), and WiseTech Global ((WTC)).

The list also includes smaller cap companies such as Ansell ((ANN)), Breville Group ((BRG)), Flight Centre ((FLT)), SiteMinder ((SDR)), Telix Pharmaceuticals ((TLX)), and Zip Co ((ZIP)) plus various commodities-related cyclicals including BlueScope Steel ((BSL)), Brickworks ((BKW)), Imdex ((IMD)), Lynas Corp ((LYC)), Nufarm ((NUF)) and Sims Group ((SGM)).

UBS strategists also highlight that if stagflation lays ahead –high inflation with an economic slump– history shows the best performers on the ASX will include gold producers and defensive telcos like Telstra Group ((TLS)) that can pass on input costs to consumers.

Strategists at Macquarie believe –with conviction– the US is steering towards recession, which means their recommended portfolio allocation is much more defensive through stocks like Telstra, Transurban ((TCL)) and APA Group ((APA)), CSL, and the two supermarket operators Coles Group ((COL)) and Woolworths Group ((WOW)).

In Macquarie’s world, everything trading on relatively high PE multiples is still facing further de-rating, including CommBank ((CBA)), Charter Hall ((CHC)), Fisher & Paykel Healthcare ((FPH)), Pro Medicus ((PME)) and TechnologyOne ((TNE)).

One place to possibly find refuge, Macquarie suggests, is among stocks that have already fallen significantly and where valuations are extremely low. Some of such ‘contrarian’ opportunities might be with Ramsay Health Care ((RHC)), IDP Education ((IEL)) and GPT Group ((GPT)).

Macquarie doesn’t think Trump is likely to blink, which leaves the onus with the Federal Reserve to break the current down cycle for equities. But the Fed is not ready yet, constrained by tariffs and inflation, implying equities will be weaker and credit spreads much higher by the time markets will see the Fed pivot.

Also, Macquarie’s proprietary FOMO meter has by now weakened to -0.5 (Monday’s price action not included). The strategists remain of the view this measurement of investor sentiment has to sink below -1 before generating a solid Buy signal.

This too suggests the local market hasn’t found its bottom as yet.

****

As I am preparing to visit Europe before and after Easter, to spend time with familiy and old friends, there won’t be a Weekly Insights or Rudi’s View story next week and the week thereafter.

Unless the volatile and fluid situation in the world forces my hand, of course. Let’s hope this won’t be the case.

I’ll still be present in the background, from a different time zone, while the rest of Your Team guarantees the continuation of your daily service.

Assuming everything goes to plan, Weekly Insights resumes on the final Monday of this month.

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(This story was written on Monday, 7 April 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.

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