Macro Intelligence: defensive sectors outperform as tariff fears reshape markets

This video and article was created on 9 April for IG audiences by ausbiz.

Written by Juliette Saly

Trump's tariffs

In this week’s edition of IG Macro Intelligence, we take a deep dive into the implications of Trump’s tariffs and how to protect your capital amidst the uncertainty.

Tariff turmoil

Markets have been in freefall amid the uncertainty caused by the Trump administration's tariffs, and fears of an all-out retaliatory trade war with China.

AMP's Shane Oliver thinks the tariffs could cause global markets to correct by around 15%, but points out 'while the fall in US shares has been rapid (the 4th fastest two-day fall since WWII), the total drop is mild when compared to the last 120 years.'

US S&P 500 historical drawdowns chart

Former Treasury Secretary Larry Summers has warned there could be much more volatility ahead for global investors, advising caution in a post on X.

Lawrence Summers tweet on S&P 500 historic two-day drop

Meanwhile, the Trump Administration has doubled down, citing longer-term gains for short-term pain. President Trump told reporters, 'I don't want anything to go down, but sometimes you have to take medicine to fix something.'

White House Trade Czar Peter Navarro told America's Fox News that the bull market will eventually roar back into action: 'We will find a bottom in this market quickly… We will hit 50,000 on the Dow easily by the end of this term.'

Economic impact

In the wake of the tariff turmoil, JP Morgan has revised down its growth forecast for the US, suggesting a 0.3% contraction in the world's largest economy throughout 2025. Barclays economists are predicting recessions in both the US and Europe due to the tariffs, while they've lowered their growth forecast for China to 4%.

Locally, the impact of the tariffs on the Australian economy are being felt not only in the stock market, but in predicted longer-term pain for growth.

Australia 200 (ASX 200) one-hour chart

Market uncertainty takes center stage

The Australia 200 experienced its sharpest one-day intraday drop since the height of the Covid-19 pandemic on Monday, plunging nearly 7% in just a week. Alongside this, the Australian dollar fell below US$0.60 for the first time since the pandemic began.

According to Jason Todd, CIO of Ten Cap, the current market issue isn't inherently negative but is dominated by uncertainty. 'We just don't know what the outcome might be,' Todd stated. 'If things were to stabilise, we might see higher inflation but slightly lower growth. This could justify a 10% decline in equity markets, which wouldn't be too out of line. However, if the situation intensifies and, given that only President Trump knows the course of action, our market could brace for further declines in both growth and confidence.'

Policy reactions and economic forecasts

In response to the recent economic shifts, ANZ has revised its interest rate cut forecasts, now expecting the Reserve Bank of Australia (RBA) to implement three additional quarter-point cuts by August. They are also not ruling out the possibility of a substantial 50 basis point (bp) cut at the next central bank meeting.

Echoing this sentiment, Phil O'Donaghue of Deutsche Bank agrees with ANZ's assessment. Meanwhile, the Federal Treasury has modeled the potential impacts of the new tariffs, predicting a modest hit to gross domestic product (GDP) of just 0.2% this year and a mere 0.1% by 2030.

Bonds reclaim status as possible safe haven

As market volatility spikes, gold prices initially surged to record highs before a broad sell-off took effect. Concurrently, US debt has seen a rally, driven by anticipations that the Federal Reserve (Fed) will implement aggressive rate cuts to stave off a recession.

Amid the ongoing volatility in global markets, Jonathan Sheridan from FIIG Securities shared insights with ausbiz about a significant reestablishment of the correlation between bonds and equities, disrupted during the Covid-19 pandemic.

He explained the complex interplay of inflation and bond yields in the current economic climate. Traditionally, tariffs are seen as inflationary, which could lead to a rise in bond yields to provide returns that outpace inflation, especially if the global economy continues to slow. Conversely, bond yields would typically fall if economic growth decelerates without added inflationary pressures.

Sheridan also touched on the potential resilience of large developed government bonds, particularly those at the short end of the curve, as central banks might continue their rate-cutting cycle in response to these dynamics.

Defensive stocks may offer shelter from market volatility

John Lockton from Sandstone Insights highlighted the dominance of defensive strategies in current stock market conditions, emphasizing capital preservation as crucial during times of uncertainty.

He pointed out that defensive stocks, such as IAG, Coles, Telstra, and Transurban, are particularly resilient and appealing for investors seeking short-term gains through market fluctuations.

The primary goal, according to Lockton, is to preserve capital in a volatile market environment.

Australia offers relative stability

In the current market downturn, experts are spotting distinct possibilities for capital allocation that could potentially lead to gains. Elise McKay from Pendal views Australia as a relatively safe investment destination, noting particular stocks that may offer protective qualities against global market turmoil.

She points out that companies engaging in share buybacks might represent a potential opportunity, particularly if they believe their shares are undervalued. She references Worley, which is in the midst of a considerable buyback initiative. The notable decline in Worley's share prices may potentially increase its attractiveness to prudent investors.

Construction and building materials in focus

Scott Philips from the Motley Fool is setting his sights on Brickworks, citing its potential for a substantial rally with an average target price set by Refinitiv at $28.30, suggesting an upside of about 20%.

Meanwhile, Philip Pepe from Shaw and Partners highlights Acrow Limited's exposure to global trade disruptions. He has established a price target of $1.30 for the stock, reflecting its current market positioning amidst what he terms the 'Orange Swan event.'

Brickworks price indicators and buy/sell signals

Acrow daily chart

Lottery sector offers defensive qualities

Additionally, analysts at Jefferies have identified lotteries as a defensive sector that remains largely unaffected by tariff concerns. They view the Lottery Corporation as possibly well-positioned to leverage its existing strategies for growth.

A majority of analysts, as surveyed by Refinitiv, hold a positive outlook on the stock with a median price target of $5.50.

Lottery Corporation daily chart

• ^{Even these traditionally stable investments carry their own risks, as they may underperform during strong bull markets and can still be affected by sector-specific challenges, regulatory changes, or broader economic downturns. Investors should carefully assess their risk tolerance and consider that past performance doesn't guarantee future stability, particularly in today's uncertain economic environment.}