Coming Up: The Real World Ramifications

At face value, investors are treating this year's 'Trump Slump' as your garden variety annual retreat post exuberance-driven all-time highs reached in early 2025.

The numbers speak for themselves. When measured from January 1st, the ASX200 is down less than -2%, excluding any dividends paid. European markets are up for the year and so are various Emerging Markets including in Asia.

Admittedly, the losses are greater in the US where the Nasdaq, for example, is still down nearly -10% year to date. But then those markets had outperformed the rest of the world multiple times over, not just for the past two years but since the end of the GFC, more than 15 years ago.

In similar fashion, the first downward adjustment for the ASX equally proved significantly more punishing for those stocks that had outperformed locally, including the AI-theme exposed Goodman Group (GMG), NextDC (NXT), Macquarie Technology (MAQ) and New Zealand-headquartered Infratil (IFT).

Post the initial turmoil in response to unprecedented US import tariffs --or merely the threat thereof-- markets have become a lot more comfortable with trends in US government communications and news flow.

I worry, however, that investors who are now concluding the worst impact from Trump policies is in the past might still be unpleasantly surprised as the real world impact is yet to show up in economic data and in corporate earnings.

Some market analysts are suggesting consensus forecasts should now be considered cum downgrades with the fresh downtrend potentially lasting a few quarters. This trend has arguably already started in Australia.

For example, FNArena's weekly update on analysts' earnings forecast changes clearly shows a skew towards more downward revisions if we exclude temporary exceptions such as Paladin Energy (PDN) and Pilbara Minerals (PLS).

History suggests if we do experience a noticeable reset in earnings expectations, both locally and overseas, this tends to create a headwind for markets generally and division between companies that suffer downgrades and those that do not.

Currently, consensus in Australia sees the average EPS for the ASX200 backtracking for the third financial year in a row, to -1.1% for FY25.

Consensus forecasts for FY26 and FY27 are suggesting above average growth of respectively 6.3% and 7.7%, but it seems unlikely those numbers will not be affected in the coming six months or so.

By how much exactly will depend on whether the US economy might fall into recession (negative growth) and, if so, how deep and for how long exactly this recession might prove to be.

Equally important: the market is positioned for RBA rate cuts in the months ahead and economists do not foresee negative GDP growth for Australia.

Already multiple fund managers have been spotted who dare to declare the Australian share market a safe haven this year, given the broader context internationally.

Certainly, Australian banks have functioned as such for international investors seeking safety from US tariffs. 

ResMed (Quality) In Focus

On Thursday last week, ResMed (RMD) yet again highlighted investor anxiety inspired by macro-economic uncertainties does not by default align with operational dynamics for individual ASX-listed companies.

Strictly taken, ResMed's quarterly proved merely in line with forecasts, at best, with a number of analysts suggesting various financial metrics actually disappointed, albeit only slightly.

The share price has enjoyed a strong upward re-adjustment in the past two trading sessions since and that means ResMed shares trading in the low $30s is simply too low given the quality, the consistency and the growth achieved and on the horizon.

Analysts continue to see double digit EPS growth forthcoming, also because management at ResMed continues to deliver positive margin surprise, with more increases flagged for the quarters ahead.

ResMed, it is safe to conclude, is now Australia's number one healthcare investment, including for the FNArena-Vested Equities All-Weather Model Portfolio, as the likes of Cochlear (COH), CSL (CSL), and Fisher & Paykel Healthcare (FPH) await better times and improving momentum.

CSL's promise of margin recovery towards pre-covid level has become an FY27 story plus the market is not sure how much of a headwind growing anti-vaccine sentiment will prove to be for Seqirus.

In contrast, ResMed's products and services are only minimally impacted by US tariffs and certainly that multi-decades long positive track record will be looked upon favourably when question marks are rising about earnings and the outlook for companies generally.

Investors with a higher risk appetite might prefer smaller caps Telix Pharmaceuticals (TLX) and Pro Medicus (PME), while shares in Sigma Healthcare (SIG) remain noticeably well-supported too.

Defensives Tell The Story

Investors who are truly worried about downside risks for the months ahead might prefer to hide in bombed-out, cheaply priced stocks like Ramsay Health Care (RHC) instead.

Admittedly, price action over the past four months suggests there's not much downside left post a truly horrendous trajectory for those shares post covid, but this still doesn't guarantee lots of future upside or no further disappointments.

Look underneath the bonnet, and it remains obvious underlying sentiment is still Risk Off, with gold outperforming oil, copper and aluminium, in a broad sense, and with steady defensives including Telstra (TLS), Transurban (TCL), the supermarket operators and many a REIT outperforming in April.

Number crunching by Morgan Stanley reveals larger caps remain most preferred with small caps in general seriously lagging, only enjoying the occasional bout of risk appetite returning.

As per always, the real challenge for investors is to acknowledge that a stock trading on a low PE ratio or high yield ("cheap") is not by definition a better returning investment than those on much higher PE ratios.

ResMed is but one example alongside the likes of Car Group (CAR), REA Group (REA) and TechnologyOne (TNE). 

All have significantly outperformed the broader market in recent weeks.

Technology & AI-laggards

Against this background, I observe investor interest has returned for higher-valued technology companies now that share prices have deflated from peak price levels.

Portfolio managers at the aforementioned Morgan Stanley made a number of changes to their Macro+ Focus List for the ASX.

Have been added: ANZ Bank (ANZ), Goodman Group (GMG), Orica (ORI), and Xero (XRO). Note this Portfolio already included Aristocrat Leisure (ALL) and Car Group.

Goodman Group, of course, is the most prominent AI and data centres exposure on the ASX, alongside pure play NextDC. Both have been the subject of questions received from FNArena subscribers as share prices only moved into one direction; south.

Part of share price weakness can be explained by growing concerns about too many data centres being build at a time when the broader AI story has seen more detractors in the face of rising uncertainty.

Morgan Stanley (believe me, I am not trying to promote a particular broker here) opened their research update on Nvidia this week with:

"The idea that we are in a digestion phase for AI is laughable given the obvious need for more inference chips which is driving a wave of very strong demand - though near term #s are capped by supply/export controls."

The All-Weather Portfolio retains exposure through Goodman Group, NextDC and Dicker Data (DDR). With regards to NextDC, Ord Minnett calculated last week the shares can be valued between $10-$11 assuming no further contracts are announced for the foreseeable future.

This is possible, of course, and easily explains why the share price bottomed above the lower price level twice in April. But if the next 100-megawatt contract is waiting to be made public, this alone would be worth $3.

Risk-adjusting the company's remaining pipeline brings Ord Minnett's valuation up to $18 a share. This aligns with FNArena's consensus target of $19.40. 

It also explains why the stock remains firmly held in the All-Weather Portfolio, alongside the other two mentioned.

Broader Outlook Remains Up For Debate

It goes without saying, none of today's calculations, projections and valuations take into account the possibility of economic calamity, locally or elsewhere. Plus, of course, who knows what might be the next decision coming out of the White House?

Broader picture, the world is still getting to grips with the many changes and implications from the Trump presidency with questions being triggered about geopolitical alliances, the dollar's reserve currency status and whether the world needs more viable alternatives outside of the US financial system.

While large international asset managers are looking to diversify into more assets outside of the US, the task remains daunting with the US Treasury market around ten times the size of equivalent rated government bonds in the euro area.

The flipside is foreigners already own an estimated 20% of US equities, implying relatively small percentages in re-allocations can potentially have outsized ramifications, at least in the short term were any such changes to take place.

A less predictable and higher risk environment can, all else remaining equal, result in lower valuations for equities generally (higher risk premium) and see bond investors demand a higher compensation (through higher yield), but it is yet undetermined whether, when and how exactly such re-adjustment might take place.

With an implied average dividend yield of 3.7% and forward-looking PE ratio of 17.3x, the Australian share market, similar to its American peers, remains higher valued than has historically been the norm, even in the face of potentially downward adjustments to consensus earnings forecasts (which will push the market's valuation higher).

Various calculations place the local market's long-term PE ratio between 14.6x and 15.7x. The ten year average is situated just under 16x while the five-year average is currently 16.8x.

While the current multiple remains above all historical averages, the assessment of how much remains dependent on which reference point is preferred.

It is possible today's investment dilemmas might well be resolved through the size of the economic impact from tariff-related disruption and uncertainties, but we won't know it until we look back with hindsight at today's set up.

Until then diversification, quality, caution and being nimble seem but the most appropriate terms to abide by.

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