Rudi’s View: TACO Time?

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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Are we there yet? From here on onward, that question is on traders and fund managers' mind.

By Rudi Filapek-Vandyck, Editor

It has taken exactly one week since Tehran became the target of Israeli and US bombs. While Iran’s leadership was swiftly decapitated on day one, with Supreme Leader Ayatollah Ali Khamenei killed alongside multiple senior regime and security officials, the regime’s vicious retaliation has surprised by causing significant damage to US assets throughout the region, as well as to the growth outlook for the global economy through a spike in energy prices.

The Strait of Hormuz –bottleneck for roughly 20% of the world’s oil transports– is effectively closed, irrespective of US’ intentions to the contrary, and the longer this remains the case, the greater the damage to economies and financial markets, the US included.

At first, markets focused on the potential for higher inflation, but in today’s world dynamics change quickly. Within the space of one week markets’ worry has shifted to global growth.

That shift in momentum explains why shares in BHP Group ((BHP)) have swiftly changed course from rallying towards $60 to now trading around $50 on Monday, and dragging the local index with it.

The world has changed dramatically over the decades past, but the last time the price of oil doubled within a relatively short time –in mid-2008– the global economy still faced a recession, even though other factors contributed as well (think the demise of Lehman Bros).

In December, only four months ago, WTI crude oil traded around US$55/bbl. On Monday, futures rallied beyond US$100/bbl. It’s not difficult to see why stunted growth and oil-vulnerability are now in focus.

Put on your worst case scenario hat and the world is staring at a come-back of the 1970s –low growth in combination with high inflation– a surefire recipe for disaster.

Not making things any easier is asset prices in 2026 are substantially higher-priced than back then.

Offsetting all of the above is today’s US President might well be the most sensitive to adverse developments in financial markets.

Up until the weekend, markets reflected confidence this outbreak of hostilities would not last long, and by doing so they were granting Trump & Co the opportunity to do whatever, whenever, however, and for as long as it takes.

That dynamic has changed now, as it is intended by Tehran’s strategy. So when’s Trump ready to TACO and call it “the greatest victory the world has ever seen” and pull up stumps?

(To those not familiar with the acronym, TACO refers to ‘Trump Always Chickens Out’ in reference to his art of the deal strategy by first declaring the worst proposition, and then scaling back to something more palatable).

Or is this really a diversion tactic over the Epstein files or an even more nefarious intent regarding the upcoming midterm elections?

Most investors not sitting into cash and/or energy-leveraged assets will be keeping their fingers crossed this is not the one time Trump decides to ignore the pressure building from financial markets (and from allies the world around).

Lessons From History

Plenty of historical precedents are available to suggest the world can deal with a temporary disruption to oil supply and a spike in energy prices.

Strategists at UBS last week published an overview reaching all the way back to the Yom Kippur war in late 1973 up until Israel’s 12 day war with Iran in June last year. With exception of only four examples, equity markets were trading higher twelve months later.

Of those four examples, three involved economic recessions including Yom Kippur, 9-11, and the Saudi oil drone attack in September 2019 (covid followed next) while the Arab Spring in 2011 preceded Europe’s Grexit crisis.

The first gulf war in August 1990 kept equities down in double digits for the following six months.

History does show such outcomes are more exception than rule. When relying on less negative outcomes, the rule of thumb seems to be that temporary oil supply disruptions are remedied within the space of circa four months.

Financial markets too tend to normalise within such period.

One key problem at this stage is there are no signals or indications about an imminent victory or cease-fire. As analysts at RBC Capital put it:

“Given the course of events, it is unclear whether the administration built an exit on its way into this latest military entanglement.”

History does suggest whenever human decision-makers and financial markets move in diametrically opposed direction, it’s usually the former who, eventually, is forced to change.

When Trump suggested the idea of taking Greenland by military force, it was suggested he abandoned that idea because financial markets were signalling they didn’t approve.

But how much damage/pressure needs to occur before “the greatest peace-maker of all time” gets the message and responds accordingly?

A Binary Set-Up

All of the above suggests today’s set up in financial markets is binary.

Today’s winners –think Woodside Energy ((WDS)), but also Ampol ((ALD)) and Viva Energy ((VEA))– will instantly face a Wile E Coyote fall from grace if/when the situation clears up around Iran and the Strait of Hormuz.

Which is why some strategists are preaching caution; i.e. take some profits, buy into dips, rather than chasing today’s energy exposures.

One quick look at share prices for the likes of Woodside and Santos ((STO)) shows shares are now trading above FNArena’s consensus targets, even with analysts upgrading energy pricing forecasts.

This suggests these share prices require a (much) higher-for-longer outcome to still offer great value at today’s prices.

While such an outcome does remain a real possibility, history also suggests expensively priced oil eventually kills itself via reduced demand, even without an economic recession on the horizon.

Just look at what happened after energy was the best performing sector throughout 2022.

Equally worth pointing out: share prices in secondary beneficiaries such as Ampol and Viva Energy are trading nowhere near consensus price targets.

The market might not be as confident about motorists’ resilience?

Strategy Adjustments

Anticipating what happens next is not for the foolish and/or the over-confident. Especially in today’s market context, the momentum pendulum can switch instantaneously, and without warning.

UBS’ in-house Aussie economist George Tharenou has now added one additional RBA rate hike to his forecast for 2026. This means; two more are forthcoming.

On this basis, strategists Richard Schellbach and Lily Huang have made some adjustments to their recommended equity sector exposures for Australian portfolios.

Industrials have been upgraded to Overweight, alongside Mining and small caps.

Banks and Energy have been upgraded to Neutral, joining consumer discretionary, healthcare, insurance and Technology and Telecom. Both insurance and TMT have been downgraded from Overweight.

Real estate and consumer staples have been downgraded to Underweight, where they join infrastructure and utilities.

Important to note: these adjustments suggest worries about higher inflation are set to over-rule economic growth concerns.

If this proves not the case, or it changes shortly, most of these changes might prove ill-advised even though small caps, for example, have already quickly and decisively de-rated against larger caps in Australia.

UBS believes this quick de-rating now insulates small caps in Australia from the current geopolitical environment.

UBS also points out in case of persisting global inflation fears, the Australian share market tends to outperform most international peers.

Wilsons’ Model Portfolio too is Overweighted resources, with a slight underweight positioning regarding Australian banks, but with an overwhelming skew toward large caps.

February Results

The general context post a more-positive-than-anticipated February results season has rapidly changed, but this still doesn’t mean all falling share prices are equal.

Portfolio managers and analysts are still using February results to separate true winners and better quality businesses from others, which can be useful input for investors using the current share market turmoil to recalibrate their strategy and portfolio.

Strategists at stockbroker Morgans put it as follows:

“While macro sentiment has created near-term noise, the underlying result fundamentals remain the strongest we have seen in three years – and that matters for patient, conviction-led investors.”

Among the changes made is stockbroker Morgans adding the following inclusions to its selection of Best Stock Ideas in Australia:

• Sigma Healthcare ((SIG))
• Generation Develoment ((GDG))
• GemLife Communities ((GLF))
• Judo Bank ((JDO))

The following have been removed:

• DigiCo Infrastructure REIT ((DGT))
• Guzman y Gomez ((GYG))
• Tyro Payments ((TYR))

The full list will be included in Thursday’s Rudi’s View update.

In their final review of the February season, Morgans strategists identified opportunities having emerged in some of their favoured high conviction names including:

• Sigma Healthcare ((SIG))
• Aristocrat Leisure ((ALL))
• Car Group ((CAR))
• REA Group ((REA))
• Generation Development ((GDG))
• Pinnacle Investment Management ((PNI))
• Eagers Automotive ((APE))
• Amcor ((AMC))
• Judo Capital ((JDO))
• Pro Medicus ((PME))
• Sonic Healthcare ((SHL))

Analysts at Citi have added data centres operator NextDC ((NXT)) to their Pan-Asia Focus List.

For more: see Rudi’s View on Thursday.

More On February

Strategists at Bell Potter found the February results season a “good one”, but also quite unforgiving as any hint of disappointment tended to see share prices weaken by -5% on average and with the average positive surprise only rewarded by circa 1%.

The three themes that are believed to determine the direction of share prices from here onward are:

• the RBA back in hiking mode
• AI transitioning to an earnings driver
• A structural capex cycle sustaining commodity prices and keeping domestic inflation elevated

The FY26 EPS growth forecast has accumulated to 14%, but is largely supported by miners and commodity pricing increases. At current spot prices, Bell Potter points out, there remains further upside on the horizon.

This broker’s base case is that commodity prices will broadly hold around these levels.

The past season also marks a fundamental pivot in the AI narrative, with Bell Potter commenting:

“The market is starting to reward companies that can use AI with tangible benefits. Household names like CBA, Telstra, Woolworths are now quantifying measurable improvements in profitability from their AI investments, a step change from the prior two years where AI was discussed but not demonstrated.”

Stocks currently Overweighted in Bell Potter’s Model Portfolio include:

• Life360 ((360))
• Amcor ((AMC))
• ANZ Bank ((ANZ))
• Bega Cheese ((BGA))
• BHP Group ((BHP))
• Car Group ((CAR))
• Challenger ((CGF))
• Capricorn Metals ((CMM))
• Cedar Woods Properties ((CWP))
• Dalrymple Bay Infrastructure ((DBI))
• Develop Global ((DVP))
• Evolution Mining ((EVN))
• Flight Centre ((FLT))
• Generation Development ((GDG))
• Goodman Group ((GMG))
• Harvey Norman ((HVN))
• Light & Wonder ((LNW))
• Macquarie Group ((MQG))
• News Corp ((NWS))
• Rio Tinto ((RIO))
• ResMed ((RMD))
• SGH Ltd ((SGH))
• Sonic Healthcare ((SHL))
• Santos ((STO))
• Woolworths ((WOW))
• WiseTech Global ((WTC))

Some interesting statistics were published by stockbroker Morgans suggesting MidCap stocks have both been rewarded and punished more than larger cap and smaller cap peers in February.

On the broker’s data, the average punishment for Midcap disappointment was -13% (ouch!) versus positive surprise being rewarded by 7.5%.

For smaller cap companies the comparable numbers are -8.6% (disappointment) and 5.1% (positive surprise).

‘Beats’ and “misses’ for ASX50 companies saw share prices on average moving by respectively -10.2% and 5.8% on results day.

Viewed through a different lens, Midcap Growth crowned itself the surprise winner, led by the likes of Hub24 ((HUB)), Netwealth Group ((NWL)), IDP Education ((IEL)), and Reliance Worldwide ((RWC)).

The worst performing segment for the season were large cap cyclicals, on the back of weakening share prices in Qantas Airways ((QAN)), Computershare ((CPU)), and Treasury Wine Estates ((TWE)).

The season’s pain trade was reserved for retailers with only two companies beating expectations against savage market responses following disappointments from Adore Beauty ((ABY)), Temple & Webster ((TPW)), and Nick Scali ((NCK)).

Healthcare, travel, US housing and technology all sat in the naughty corner in February.

One metric that defines February as one of the best seasons in a very long time is 69% of dividend-paying companies increasing their distribution in February.

Morgans reports this is a meaningful ‘beat’ from the prior 55%. The offset is the ASX200 exited the month at a 24% premium versus its 10-year PE average.

The latter is rapidly correcting since.

For more ideas and insights: see Thursday.

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