Rudi’s View: Stagflation, No Recession

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

As the world remains confident the situation in the Middle East will be resolved, Australia feels the pain.

By Rudi Filapek-Vandyck, Editor

Are markets becoming complacent?

The question has been asked multiple times over since war in the Middle East erupted on the final day of February. It is also the title above the latest media note from Franklin Templeton that entered the FNArena inbox this week.

But investors should not judge this market at face value. Beyond the opening paragraphs from Franklin Templeton’s latest missive awaits a fairly constructive view for US and global equities generally as worst case scenarios remain off the agenda.

The world still has multiple tailwinds that will soften the blow from the current energy crisis.

On Wednesday, at a presentation in Sydney CBD, global strategists at JP Morgan proved equally as sanguine about the current stand-off around the Strait of Hormuz and its impact on economies and share markets.

If anyone is genuinely curious just why US equities manage to post fresh all-time record highs while there seems to be so much uncertainty related to war(s) in the Middle East, the constructive confidence as expressed by Franklin Templeton and JP Morgan might just provide the answer.

This Too Shall Pass

It is JP Morgan’s base case view that opponents in the Middle East will come to a resolution, one way or another, though the exact timing and details remain unknown.

Once the Hormuz bottleneck has been resolved, the price of crude oil is expected to settle in a US$90-US$85/bbl range. Higher than pre-war, but insufficiently elevated to fully negate the positive tailwinds most regions are still enjoying.

Those tailwinds are lined up by Franklin Templeton as follows:

• In the United States, Europe and Japan, fiscal expansion should ease some of the pain.
• In the United States, higher-income households, which account for over half of consumption (the top 20% of US households by income are responsible for 60% of all consumer spending) could see their purchasing power boosted by tax refunds and wealth gains.
• Also, the global momentum behind capital expenditures on AI, energy infrastructure and supply-chain management offers the US and world economies a powerful set of tailwinds.
• The rapid diffusion of new technologies, above all AI, appears to be boosting US productivity. After averaging a modest 1.3% annual average growth rate from 2010–2019, US non-farm labor productivity has accelerated to 2.5% over the past two years. Accelerating productivity makes the US economy stronger and more resilient.
• A second source of resilience is the smaller share of US GDP devoted to energy expenditures. Since the late 1970s, energy consumption per capita in the United States has fallen by 20%, while rising domestic production has turned the country from a hydrocarbon importer to an exporter. Accordingly, the economy has become less sensitive to energy price shocks.
• Central banks will likely respond with caution. Notwithstanding higher prices today for energy and forthcoming price increases for food and other goods and services, central banks are likely to respond cautiously.
• One-time price increases stemming from energy supply shocks typically fade, and some slowing of growth is likely. Hence, central banks will be reluctant to raise interest rates aggressively. Moreover, markets have already discounted rate hikes where they are most likely — in Europe and Japan.
• (Also in Australia, but for some reason that’s not mentioned).
• Corporate earnings growth is stellar. Throughout first quarter 2026, and even as the war commenced, analysts were busy upgrading already-robust 2026 profits estimates.
• Information technology and financials, alongside energy, have seen the biggest upward revisions. After the first two weeks of the earnings season, “beats” remain healthy and S&P500 earnings per share are tracking 15% higher year-on-year.
• The bears have been burned before. The behaviour of markets is also psychological. Sentiment may reflect concerns, but investors also remember the pain of selling aggressively following the “Liberation Day” tariffs of 2025, only to see a sharp policy and market reversal.

Australia Beating Its Own Drum

One not unimportant fact to highlight here is most of these constructive analyses relate to the US which, on all accounts, is probably the most resilient economy on earth right now, and not so much to Australia where the pain is already showing up in corporate profit warnings (now a daily occurrence).

It is for this very reason Australian asset consultancy Atchison decided this week to underweight the ASX and overweight US shares.

Atchison’s motivation: “Australia doesn’t have enough energy sector exposure to benefit from elevated oil prices, but faces all the same inflationary consequences”.

On the day Woolworths Group ((WOW)) added yet another corporate profit warning –shares down more than -7%, but still well off their sub-$30 low– the Australian share market is weakening for the eighth successive day.

Last time the ASX200 sank eight days in a row was in 2018.

For what it’s worth, JP Morgan thinks bond markets, locally and elsewhere, are too aggressively pricing in central bank rate hikes. As the pain from higher inflation weighs on economic momentum, the RBA is expected to hike one more time (probably in May) and that’ll be the end of the current tightening cycle.

Slower growth and higher inflation will still create a stagflationary environment, but it should not result in recession. JP Morgan is projecting GDP growth to slow from 2.5% to 1.5%, which represents a big blow for the Australian economy, but not a disastrous outcome.

Once the Strait of Hormuz is de-bottlenecked, this loss in economic momentum, on the back of declines in housing activity and consumer spending, should also pull down local inflation numbers.

In Europe, the ECB is equally projected to hike once while the Federal Reserve should be in a position to deliver its final rate cuts in the second half of the year.

The Australian dollar is expected to trade at US70c by year-end.

AI Remains An Important Feature

JP Morgan remains equally constructive on US hyperscalers and the AI infrastructure build-out; positives for the US economy overall.

Amidst the mindboggling sums allocated to AI infrastructure, cash flows at hyperscalers are now negative, but capex spending is likely to peak this year and that means there’ll be plenty of free cash flow available from next year onwards, so is the expectation.

While the debate on AI’s ramifications for the software sector rages on, JP Morgan avoids taking a binary view, instead its analysts are trying to figure out which companies are likely to gain, if not thrive, under the changing circumstances.

Given the software sector has been significantly de-rated globally, owning companies that have been unfairly treated as an “AI loser” could well prove very rewarding.

And that’s at least something Australia shares with the US and the rest of the world.

Best Buys & Conviction Calls

ASX representation in Goldman Sachs‘ selection of Conviction Buys in the APAC region is limited to two (28 selected in total):

• Fisher & Paykel Healthcare ((FPH))
• Ramelius Resources ((RMS))

Goldman Sachs’ conviction is shared among others when it comes to gold producer Ramelius, but less so for the breathing devices manufacturer.

Of the six brokers covering the gold producer, all have Buy ratings with share price targets well above today’s share price.

For the NZ-headquartered healthcare business the score is three Buys versus three on Neutral/Hold.

****

Analysis by Morningstar Australia has generated some positive news for Australian investors; while payout ratios are generally under pressure, they should on balance remain around 66%, but dividend payments in aggregate should rise as the more cyclical parts of the bourse are expected to pay out more to shareholders.

Nearly 60% of all companies covered by Morningstar are projected to raise distributions in FY26. That percentage is projected to lift to 74% for FY27.

The strongest growth is expected to come from utilities, communication services, and consumer cyclicals, with upside surprise potential from miners and the energy sector.

Changes made since the last update on attractive dividend stocks:

• Car Group ((CAR)) has been added to the Top Pick List
• Telstra Group ((TLS)) has been removed (strong share price, lower yield)
• Treasury Wine Estates ((TWE)) has been removed (interim dividend was suspended)

Morninstar’s Dividend Pick List now consists of the following 23 stocks:

• AGL Energy ((AGL))
• Amcor ((AMC))
• ANZ Bank ((ANZ))
• APA Group ((APA))
• ASX Ltd ((ASX))
• Atlas Arteria ((ALX))
• Aurizon Holdings ((AZJ))
• BHP Group ((BHP))
• Car Group ((CAR))
• Charter Hall Long WALE ((CLW))
• Chorus ((CNU))
• Deterra Royalties ((DRR))
• Dexus ((DXS))
• Endeavour Group ((EDV))
• Genesis Energy ((GNE))
• GPT Group ((GPT))
• Rio Tinto ((RIO))
• Steadfast Group ((SDF))
• Sonic Healthcare ((SHL))
• Spark New Zealand ((SPK))
• Viva Energy ((VEA))
• Woodside Energy ((WDS))
• Woolworths Group ((WOW))

Monday’s Weekly Insights: https://fnarena.com/index.php/2026/04/29/rudis-view-more-downgrades-are-coming/

(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.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi’s View stories. Go to My Alerts (top bar of the website) and tick the box in front of ‘Rudi’s View’. You will receive an email alert every time a new Rudi’s View story has been published on the website. 

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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