Why the tariff pause leaves Aussie investors with an agonising call
The ASX isn’t rallying as hard as Wall Street because of our safe-haven status protected us from the worst of tariff pain. But stocks look expensive again, and FOMO is dangerous.
May 13, 2025 – 3.08pm
AFR Chanticleer
On Wall Street, they partied like it was 1999 after US President Donald Trump announced a 90-day pause on Chinese tariffs. In Australia, the celebrations were much more restrained: the ASX 200 rose just 0.5 per cent on Tuesday, compared with the 3.6 per cent surge for the S&P 500.
The main reason for the muted reaction was that Australian stocks have run very hard, jumping 12.8 per cent from their recent trough on April 7; the ASX 200 is now 4.4 per cent above where it sat on April 2, before Trump announced his liberation day tariff announcement.
UBS Australia strategist Richard Schellbach says the local bourse proved more resilient than many share indices around the world for a few key reasons.
First, Australia was seen as less economically impacted than just about any other market out there, due to a mix of our proximity to the epicentre of the trade war, and a local sharemarket that is domestically focused. Secondly the ASX started to attract safe-haven investment flows from investors looking to switch out of US dollar assets and hide in big, liquid stocks like Commonwealth Bank, Telstra, Coles and Woolworths. And finally, our gold miners did well as the gold price soared in response to global turmoil.
But you can’t enjoy the boost from being a safe haven and then rally hard when the world goes risk-on. Schellbach says the big moves on the ASX 200 on Tuesday are exactly what you’d expect to see at a moment like this: defensive stocks like Telstra, Coles and Woolworths were down 2 per cent or more, the gold sector retreated, beaten-up energy stocks including Woodside and Santos rose sharply, and China-exposed mining stocks like BHP and Rio Tinto enjoyed a boost.
Schellbach says the feeling of relief among local investors means the ASX 200 can keep rising if the rally on global markets continues. But Aussie stocks just won’t rally as hard as overseas peers, because they weren’t hit as hard.
And now comes the hard part for Aussie investors, and particularly those who reduced their exposure to the local market in April as the tariff turmoil reigned: is this ASX rally one you want to chase?
On the one hand, the sense we’ve passed the peak of tariff uncertainty adds to a potential Goldilocks scenario for Australian investors, who could benefit from strong continued spending under the new Albanese government, rate cuts from the Reserve Bank and lower oil prices, which Morgan Stanley strategist Chris Nicol estimates should put about $2 billion extra in the pockets of Australian households. Add in the potential that China does push the button on fiscal stimulus in response to growing signs of deflation, and the setup looks pretty good.
But Schellbach admits to a feeling of unease. The ASX 200’s round trip from its tariff lows takes it back to within 3 per cent of the record high it reached in January, and moves the market’s forward price-to-earnings multiple back to just over 18 times; for comparison, that’s well above the long-term average of 14.9 times and the multiple of 16.5 times where Schellbach reckons fair value actually sits, accounting for the increase in the number of quality companies on the local bourse. Excluding resources, the market is trading on 20.3 times earnings, versus a long-run average of 13.5 times.
High valuations aren’t necessarily a problem in and of themselves. And Schellbach says they’re common when we’re late into an interest rate hiking cycle; the market predicts rate cuts, factors in a boost to earnings, and stock prices go up.
But there are three problems with this scenario. Firstly, the narrative of earnings improvement isn’t exactly being borne out. Schellbach says the February earnings season was just OK, and trading updates delivered in the last couple of weeks have been middling at best, with more downgrades than upgrades.
The second problem is that Trump’s tariff pause may also reduce the amount of rate relief the RBA provides; on Tuesday, markets trimmed their rate cut bets for calendar 2025 from 110 basis points to 85 basis points, or four-and-a-bit cuts to three-and-a-bit cuts. If the rate cut support is now delayed by good news, could the earnings recovery be delayed, too?
The third problem is one confronting investors all over the world: how do you balance the price of uncertainty against what are, once again, historically expensive valuations?
As Barrenjoey’s Jo Masters says, while the risks to global growth have clearly been reduced by the tariff pause, trade uncertainty is likely to be a feature of Trump’s four years in power. Even with the average weighted US tariff rate down from 25.0 per cent to 11.3 per cent, that’s still about five times higher than where we started the year. And “the Trump administration has shown a willingness to move and shift quickly,” she notes.
Schellbach says this uncertainty should mean investors demand a higher risk premium or put another way, a lower earnings multiple – from local stocks. But in a moment like this, when FOMO is everywhere and being too defensive has proved very costly, fundamentals may fall by the wayside – again.
