Wilson's Damien Boey on how to position for the liquidity drain rocking share markets

Brutal cuts in US government spending are pushing share market valuations lower, raising the risk of a recession, and stoking asset price volatility, according to Wilson Asset Management's portfolio strategist Damien Boey. 

Speaking to Livewire, the strategist warned his research shows the US government has slashed its fiscal deficit as a percentage of gross domestic product (GDP) from between 9% and 10% at the end of 2024 to between 4% and 5% this week. 

“That’s very rapid, and a lot of the monetary injection is slowing down,” Boey says. "We think yesterday's share market winners are not tomorrow's winners. The market's ridden all these AI winners on the way up on this regime of fiscal deficit spending. 

"But, there's a decent argument a lot of that fiscal deficit spending has gone into specific company earnings one way or another, so that's a key lesson from the unwind we're seeing, and that's before you consider the slow down versus US recession risk."

Liquidity drain

Boey calculates the liquidity drain by tracking daily US treasury department data and suggests it's linked to the pullback in US stocks as the US S&P/500 extended losses on Tuesday to near 10% off its February high.  

"You'd still be overweight the US of course, but maybe now there's other places to park money at the margins in Europe and China," he says. 

"As a house, we think you've got to be contrarian though and go against the momentum, we have no faith in trends or momentum, so sell last year's winners and be constructive on last year's losers.

"In Australia, we favour resources over the banks, that's not saying we go into recession, it's simply saying those [artificial intelligence and banks] trades are too crowded and China probably has some way to go in the cycle," he says. 

“In the US you don't need a recession to get earnings downgrades. You can get earnings downgrades with just below-par growth. In the background there's an argument that the Fed stands ready to cut in response to recession risk, but the underlying problem is almost every inflation indicator for the US is pointing up."

US data flashes warning on economy

According to Boey, the the look through from recent US economic data is a worry. It includes last week's University of Michigan Survey of Consumers that showed one-year inflation expectations jumped to 4.9% - at their highest level since 2022 - as overall consumer confidence also slumped in an outcome linked to the stock market's decline. 

"The number one thing we don’t want to see is that inflation gets baked into people’s expectations. And guess what? It actually is starting to get back into people’s expectations," he says. 

The strategist, who will work as a portfolio manager on the new Wilson Income Maximiser Fund (ASX: WMX), also points to Challenger, Gray job cuts data that showed 172.017 job losses in the US in February and at their highest level for the month since the GFC-induced redundancies of 2009. 

Under the new Trump administration the DOGE Department of Government Efficiency is linked to the shakeout, while Treasury Secretary Scott Bessent has warned frothy share valuations face "a period of detox", as he fixes the nation's debt problem by slashing spending in a move likely to slow its economy. 

How to position in equities 

Boey says the mixed outlook means equity investors must navigate "a narrow path in 2025" given any decent rebound in bond yields is likely to hurt share valuations, while a continuing decline in yields likely signals a major growth slowdown ahead.

He says equity investors should position for this higher-for-longer rates environment, increased geopolitical risk, and spending cuts by taking a contrarian approach away from crowded trades linked to artificial intelligence and overvalued banks.

Some of the businesses Wilson's new income fund owns and Boey says local equity investors should look at for 2025, include iron ore and copper miner Rio Tinto (ASX: RIO), BHP Group (ASX: BHP), insurance groups, telcos like Telstra (ASX: TLS) and commercial infrastructure operator Goodman Group (ASX: GMG) after shares sold-off over the last month. Stocks related to Beijing's ability to stimulate China's economy are also on Boey's watch list, including Treasury Wines (ASX: TWE) and infant formula group a2 Milk (ASX: A2M).

Rate outlook

As to whether central banks could ride to the rescue of interest rate sensitive technology and long duration growth stocks in 2025, Boey says the market's too optimistic about rate cuts given the latest inflation data and risks. 

This also means the recent bond market rally may be too aggressively pricing in short-term rate cuts.

"So, the valuation of bonds longer term is attractive," he says. "But I don't see an immediate catalyst to realise that now. The trouble is we don't think central banks will be cutting rates in a hurry to make bond prices go up."

In Australia, Boey says the best case scenario is one interest rate cut over the next 12 months from the Reserve Bank, while he thinks market pricing for three rate cuts from the Fed in 2025 is too optimistic given the inflation risks. 

The strategist will co-manage the Wilson Income Maximiser Fund after moving to the asset manager from investment bank Barrenjoey, where he was known for his cerebral nature and forthright market calls.