Insights

After weeks of wild market swings, the US administration has finally paused its most aggressive reciprocal tariffs for at least 90 days. This pause led to the Nasdaq soaring over 12% in a single session, marking its best day since 2001. However, the question remains: is this a relief rally, or is it something more sustainable? The 90-day tariff pause gives countries and companies some breathing room to negotiate their strategies moving forward. However, China still faces 145% tariffs, and negotiations are expected to drag on, with Beijing vowing to fight until the end while the White House seeks to rewrite the global trade order. This creates a high-stakes environment.

For investors, it’s important to focus on upgrading portfolio quality. Stocks that are well-placed, class-leading companies with pricing power are best equipped to weather potential cost inflation and market volatility. Companies like Goodman Group, Pinnacle, Macquarie Group, and Y State are examples of those that can absorb price shocks and remain strong despite recent volatility. Additionally, investors should use volatility wisely. The 12% rise in the Nasdaq is a reminder that panic can create opportunities. High-conviction names in the growth space, such as Hub24, Guzman Gomez in the quick-service restaurant sector, and Pro Medicus in healthcare IT, are all businesses built for long-term growth.

In conclusion, the next 90 days could be critical in determining the outcome of both the tariff situation and this rally. Investors are reminded to stick to the fundamentals, focus on quality, and avoid letting tariff headlines dictate their strategies.

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Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy.

This publication covers

Economics - Tariffs and uncertainty: Charting a course in global trade
Asset Allocation - Look beyond the usual places for alpha
Equity Strategy - Broadening our portfolio exposure
Fixed Interest - A step forward for corporate bond reform
Banks - Post results season volatility
Industrials - Volatility creates opportunities
Resources and Energy - Trade war blunts near term sentiment
Technology - Opportunities emerging
Consumer discretionary - Encouraging medium-term signs
Telco - A cautious eye on competitive intensity
Travel - Demand trends still solid
Property - An improving Cycle

US President Donald Trump’s “liberation day” tariffs have rattled global markets. Since the pronouncement, most global indices have been down by over 10%. The scope and magnitude of the tariffs are more severe than we, and the market, expected. These are emotional times for investors, but for those with a long-term perspective, we believe short-term market volatility is a distraction that is better off ignored.

While the market could be in for a bumpy ride over the next few months, patience, a well-thought-out strategy, and the ability to look through market turbulence are key to unlocking performance during such unusual times. This quarter, we cover the economic implications of the announced tariffs and how this shapes our asset allocation decisions. We also provide an outlook for the key sectors of the Australian market and where we see the best tactical opportunities.

Morgans clients receive exclusive insights such as access to our latest Investment Watch publication. Contact us today to begin your journey with Morgans.

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Morgans Financial's Chief Economist and Director of Strategy, Michael Knox, discusses President Trump's introduction of reciprocal tariffs to address high foreign tariffs on U.S. goods. Learn how this policy aims to balance trade and reduce the U.S. budget deficit, impacting countries like China, the EU, Vietnam, and Australia. Read the transcription below:

"Back in November, we began discussing a policy document written by Peter Navarro, who had outlined what he expected the Trump administration to achieve if it were elected. One key part of this policy involved reciprocal trade, which aimed to address the issue of high tariffs charged by other countries on imports of U.S. goods. The idea was to create a structure for negotiating down these tariffs.

Navarro argued that many countries were imposing very high tariffs on U.S. imports, and the goal was to bring these rates into alignment with those that the U.S. imposes on goods from those countries. Fast forward several months. This week, President Trump issued an executive order that introduced these reciprocal tariffs. Essentially, the idea is that the U.S. will impose tariffs on other countries promted by the tariffs they charge on U.S. goods. For example, countries like Vietnam or China charge significantly higher tariffs on American goods than the U.S. charges on imports from these countries. The U.S. proposal is to raise its tariffs to match half the rates charged by these countries.

For instance, China currently imposes a 67% tariff on American goods, while the U.S. only charges about 2.5%. Under the new proposal, the U.S. would raise its tariffs on Chinese goods to 34%, which is half of the Chinese tariff. Similarly, the European Union charges about a 39% tariff on U.S. goods, and the U.S. now plans to charge 20% on imports from the EU. Vietnam, which imposes around a 90% tariff, would see U.S. tariffs rise to 46% . Taiwan, which has a tariff of 64%, would be subject to a 32% tariff.

Australia, however, fares better with only a 10% tariff on U.S. goods. Some have questioned why Australia faces this tariff despite not charging any tariffs on American imports. The reason, according to Navarro, is that Australia's Goods and Services Tax (GST) is 10%, which, while not a tariff, effectively raises the price of imported goods in the same way that tariffs do. Therefore, it is treated similarly to an import tariff.

Although this concept of reciprocal tariffs has been discussed since November, it came as a surprise to many countries when Trump made the announcement in the Rose Garden this week. For some nations, like Australia, the 10% tariff may be the best deal available. This is because the U.S. is aiming to reduce its budget deficit, which is currently running at about 6.8% of GDP. Part of this effort involves raising revenue through tariffs. The U.S. hopes to reduce its deficit to about 3% by cutting spending and increasing revenue.

Ultimately, the goal of these reciprocal tariffs is to create a bargaining process where other countries can negotiate lower tariffs. As the market adjusts to this idea, we expect the situation to stabilise. Over the coming weeks, there may be more clarity on how these tariffs will be applied and whether countries can reach agreements to reduce them to more reasonable levels. The market has already reacted dramatically to the news, but as this process unfolds, it’s likely that the global economy will adapt to the changes, and the financial system will settle down."

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In a recent radio interview, Michael Knox, Chief Economist and Director of Strategy at Morgans, shared his perspective on Australia's economic trajectory. Knox highlighted concerns about the country's increasing debt and reliance on foreign borrowing, suggesting that Australia is spending beyond its means. Read the transcript below:

Knox:‍

"Well, Australia looks like it's a country that's spending more money than it has, and it’s financing that by foreign borrowing. That's what it looks like to me. I’m looking at a wonderful document, which is the sales document that goes with the budget parties, called Building Australia’s Future.

I'm not focused on the text; I'm looking at all the appendices at the end. When I do that, I find that Australia’s debt from 2024/2025, out to 2028/2029, is expected to grow by $283 billion, from $940 billion to $1.223 trillion. Net debt is expected to grow by a little less than that, as our foreign investments are improving, which brings it to $212 billion. So, that seems to be something for future generations to deal with. The money appears to be coming from those nice people who go to Davos.

A couple of years ago, we were running a current account surplus, and we were often running a trade surplus. But now, we’re running a current account deficit. This was way back when commodity prices werethe best ever in Australian history, and that’s when Jim Chalmers made 'the biggest ever fiscal improvement' by running a balanced budget with a narrow surplus.

Now we have the dividends of this 'responsible economic management'. However, when I look at what’s happening, we’re seeing a current account balance that’s getting worse every year for the next four years. The outcome last year was a deficit of 1.3%, and by the time we get to 2025–2026, this deficit is projected to blow out to 3.75%, and by 2026–2027, it will be even worse, with a current account deficit of over 4%.

So, where is this growth coming from? It's driven by public spending, financed by all those nice people at Davos who are lending us money, increasing Australia's foreign debt."

Austin:

"My guest is Michael Knox, chief economist at Morgans. Bob Katter, a long-standing federal politician, says the 2025 budget reveals a government more focused on reactive policies than proactively addressing the needs of our nation. Is he right?"

Knox:

"Well, we've got a government here that seems to be focused entirely on the most important thing in the world for them: getting re-elected. What we’re seeing is a lot of spending in the current year, 2024–2025, with public final demand increasing by 5%, while private demand is only growing at 1%. The normal growth rate would be around 2%.

So, there’s a blowout in public spending, which, I’m sure, is carefully targeted at interest groups selected through political research. As a result, this is generating a deficit and more debt. The crucial objective here is that the government wants to get re-elected."

Austin:

"Dr. Jim Chalmers did his doctorate on Paul Keating's government 39 years ago. Paul Keating once said, "If you're not hitting 4%, you're not even trying," and he warned that, if we weren’t careful, we’d become a banana republic. Do the debt figures from the appendices of the federal budget suggest that we are acting like a 'banana republic', as Paul Keating warned nearly four decades ago?

When I look at this deterioration of the current account, from 1.3% of GDP in the year just past (2023/2024), blowing out to 4.25% for the current account deficit in 2027/2028, it seems that Paul Keating would recognise this as delightfully South American."

Austin:

"Michael Knox, thank you very much for your time."

Listen the full interview here.

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Celebrating Two Decades of Impact with the Morgans Foundation

Established in 2005, the Morgans Foundation has donated over $20 million to charities across Australia. This unwavering commitment to philanthropy has been a cornerstone of Morgans Financial Limited's mission to give back to the community.

Empowering Communities

For 20 years the Foundation has been a steadfast supporter raising funds and awareness for numerous charities.

The Foundation's support extends to a diverse range of causes, from health and education to social welfare and the arts. By partnering with local Morgans branches, the Foundation ensures that support reaches grassroots initiatives, addressing specific community needs and fostering a culture of giving among employees and clients alike.

Commitment to Rural and Regional Communities

Furthermore, Big Dry Friday our annual charity initiative has raised over $8 million in eight years and supports rural communities affected by drought pressing issues, providing much-needed relief and support to those facing challenging times. Beneficiaries include, Rural Aid, Outback Futures, Schools Plus and Royal Flying Doctor Service.

Employee Engagement

Central to the Foundation's philosophy is the active involvement of Morgans' employees. In 2024 alone, over 150 employees volunteered their time and skills, embodying the spirit of community service and enhancing the impact of the Foundation's initiatives.

Looking Ahead

As we celebrate this 20-year milestone, we remain committed in our mission to support and uplift Australian communities. With a continued focus on collaboration, responsiveness, and impactful giving, we look forward to the next chapter.​

For more information about the Morgans Foundation and our initiatives, visit Morgans Foundation.

Staking it all on tax cuts and cost-of-living relief

The government largely pre-announced the 2025-26 Federal Budget over the past week. Handing down a deficit in 2024-25 and delivering further cost-of-living relief. The government did keep a tax cut up its sleeve and announced a reduction in the tax rate for all taxpayers. While there's a little bit for everyone, the forecast deficits for the next four years limit the government's ability to push harder on spending. Still, there's no denying this is a pre-election budget designed to appeal to the mainstream voter by putting spending ahead of saving.

Treasurer Jim Chalmers' fourth Budget shows the government is on track to achieve a budget deficit of $27.6bn, a slight deterioration from MYEFO that predicted a $26.9bn deficit. A range of upside surprises again drove revenue (the strong labour market, strong wage growth, and net overseas migration) but was offset by higher-than-forecast spending.

The key announcements were tax cuts, the extension of the energy rebates, GP bulk-billing funding and further support for the "Future Made in Australia" program. However, there has been no meaningful attempt to tackle structural pressures from NDIS, aged care, and health care, which has seen growth outpace inflation over the past few years.

Ahead of the election, this was the last chance for the government to demonstrate their economic credentials. Without meaningful reform, a helping hand from commodity prices, and a strong labour market, this Budget was underwhelming from a market perspective. In summary, the measures announced today will unlikely move the dial on market sentiment.

And there goes the surplus – The Budget swings back into a deficit in FY25 (-1.0% of GDP), which is forecast to remain over the forecast period (FY26-FY29). Deficits are expected over forward estimates as commodity prices ease and unemployment set to rise. Also, extra spending commitments (tax cuts, changes to Medicare and changes to education) will weaken the fiscal position over the forecast period. The capacity for the economy to absorb higher interest repayments will be tested over the next few years if government revenue declines as economic conditions deteriorate as expected.

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Treasury's forecast for gross debt rises from A$940b in 2024-25 (33.7% of GDP) to peak at A$1,161b in 2027-28 (36.9% of GDP). However, Australia's fiscal position remains well below peers global peers, which reinforces the highest possible sovereign credit rating.

World Gross Debt-to-GDP (IMF Forecasts and Treasury Estimates)

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• Mildly inflationary but no big deal for equity markets – taking everything into account, a surprise tax cut, a bump in government spending, and some targeted measures to address cost-of-living pressure should not worry investors. Importantly for the market, a strong fiscal position and few inflation-inducing spending measures should also reassure investors that a slowdown is possible without a recession.

• A few more consumption levers were pulled this year ahead of the election – As anticipated, an extension to the energy rebates and changes bulk-billing and Medicare were announced. The government also surprised us by announcing a tax cut for all taxpayers, with the average worker expected to save $268 in FY27 and $536 in FY28. It also announced support for students with outstanding HELP debt by reducing the balance by 20%. All considered, the measures incrementally support consumption and sentiment.

• Budget assumptions and a cut expected to net overseas migration – Forecasts provide a low hurdle for the December MYEFO and next year's Budget. Key commodities are assumed to decline from elevated levels with iron ore price assumed to decline from US$101/tonne to US$60/tonne by March 2026; the metallurgical coal spot price declines from US$188 to US$140/tonne; the thermal coal spot price declines from US$97 to US$70/tonne. The AUD is expected to remain at 62c through the forecast period. The Budget expects net overseas migration to be 335,000 this year, after 435,000 last year. The government forecasts that it will fall to 260,000 in FY26, to 225,000 in the following years. Notably the RBA cash rate is assumed to fall a further 50bps in 2025.

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Our thoughts

The quest for re-election is staked on the success of this Budget. Labor's fourth attempt put aside fiscal restraint and delivered a suite of spending promises. It was clearly designed to appeal to the mainstream voter by putting tax cuts front and centre promising something for every taxpayer. Changes to Medicare and some cost-of-living relief will provide some support for domestic demand, which in our view is mildly inflationary but unlikely to move the dial meaningfully on corporate profitability.

Successive governments have lacked the determination to bring about significant structural reform, chiefly around genuine tax reform, productivity and housing. This Budget is no different. The lack of genuine long-term reform through a period when the federal balance sheet has been boosted by elevated tax revenues, a strong job market and higher than expected commodity revenue is a missed opportunity for Labor.

In our view, the Budget is unlikely to bring about significant revisions to corporate earnings, however the ongoing commitment to support the vulnerable parts of the economy should help market sentiment and support earnings confidence. We prefer a targeted portfolio approach favouring quality (strong cashflow and market position e.g. JHX, DBI, QBE, CSL), and select cyclicals (QAL, UNI, ALQ, ORI, BHP). See our Best Ideas for our most preferred exposures.

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