Australian Economy

ASX sell-off a ‘real downturn’ and risk of global recession close to 50/50, analyst warns

It may sound a little strange that global markets are going through a meltdown due to fears of a potential recession in the next year or two, particularly given how strong the economy has been performing.

Last week, the ASX 200 fell by 6.6 per cent — its worst fall since the COVID-19 crash of March 2020.

The Australian share market is undergoing a correction, having dropped by more than 15.5 per cent from its record high in August last year.

To be classed as a “bear” market, it will need to drop at least a further 4.5 per cent.

Meanwhile, on Wall Street, the S&P 500 and Nasdaq are deep in bear-market territory, having plummeted by more than 20 and 30 per cent, respectively, from their all-time highs.

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AustralianSuper boss says a recession is coming.

In recent months, the Reserve Bank, US Federal Reserve and their global counterparts have lifted interest rates aggressively to bring down the cost of living, which has surged by its fastest pace in many decades.

They have also removed trillions of dollars’ worth of stimulus which they had pumped into their COVID-ravaged economies over the past couple of years — a move which has caused their economies to overheat and for bubbles to emerge in the stock, property and cryptocurrency markets.

“This is a real downturn that is happening for real reason,” nabTrade’s head of investment behaviour, Gemma Dale, told ABC News.

“It’s not just sentiment. Higher rates mean that you should pay less for equities (shares). 

Gemma Dale from nabtrade
Gemma Dale says the current trading environment is especially risky.(ABC News: John Gunn)

“Any company with a lot of debt is going to perform badly and a higher interest-rate environment,” Ms Dale said, referring specifically to unprofitable tech and buy now, pay later companies.

On the flip side, she is more optimistic about infrastructure and toll road stocks.

“Any company that can pass on their increased costs directly to the consumer, without any meaningful fall in volume … are really good companies to look at.”

‘Too early’ to say markets have bottomed

The share market is undergoing an increasingly volatile period as there is considerable debate about how rapidly, and by how much, the RBA and its global peers will lift interest rates.

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However, it is tough for central banks to reach a “neutral rate”. It is a sweet spot where they are not stimulating the economy, nor are they causing it to slow down.

The US Fed, in particular, does not have a great track record when it comes to avoiding economic downturns during their previous rate hiking cycles.

The Fed has “never been able to correct” even smaller overshoots of inflation and employment “without pushing the economy into a significant recession”, according to Deutsche Bank, which is forecasting a major recession for the US.

“We remain of the view that a global recession can be avoided,” AMP Capital chief economist Shane Oliver said.

“Either way, it’s still too early to say that shares have bottomed.”

Beware the ‘dead cat bounce’

Despite the market falling deeper into a “correction” or “bear-market” phase, some market experts are warning against “buying the dip”.

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