The Australian market has followed US equities sharply lower over the last week, after US President Trump unveiled a ‘worse than feared’ set of tariffs against major trading partners. 

Trump’s broad set of ‘reciprocal’ tariffs includes an additional 34% on China (on top of the 20% previously announced), as well as 20% on the EU and 24% on Japan. Australia and the UK have emerged relatively unscathed, with the base rate of 10% imposed on both countries. 

China has responded with a 34% levy on all US imports, while the EU will vote on its proposed US$28 billion of retaliatory tariffs later this week. 

While the situation remains fluid, the initial retaliation push is incrementally negative for the global economy, and hence both global and domestic equities. 

Recessionary tail risks in the US and globally have risen markedly since the tariff announcements. However, on the bright side, the ASX is relatively well placed (compared to offshore markets) due to a fairly limited direct tariff impost on the Australian economy, the prospect of further RBA rate cuts this year, and a relatively attractive cyclical backdrop (with a return to positive earnings growth in FY26). 

High-growth companies and offshore earners have led the pullback

The ASX 200 has fallen 14% from its mid-February highs. The market dislocation has been broad-based, although weakness has been disproportionate within high-growth (e.g. IT) and cyclical sectors (e.g. Energy, Consumer Discretionary, Financials). Meanwhile, defensive sectors (e.g. Utilities, Consumer Staples) have unsurprisingly outperformed in the ‘risk-off’ environment. 

Companies with material offshore (particularly US) earnings have been hit particularly hard in the pullback (especially those with cyclical demand profiles), as have companies with leverage to financial markets (e.g. Asset Managers/Investment Banks /Investment Platforms). 

In this report, we have taken the opportunity to increase the portfolio’s exposure to high-quality defensives, by adding Woolworths Group and upweighting Brambles. We have also increased our exposure to the gold mining sector by increasing our weighting in Evolution Mining, consistent with our positive outlook for the commodity as a 'safe haven' asset in an uncertain environment. These changes have been funded by the removal of Breville and WEB Travel amidst mounting global macro concerns. 

The Focus Portfolio is relatively well placed to navigate Trump’s announced tariffs on US imports. 

Breville (removed from portfolio) has the greatest exposure to the tariffs in a direct sense, given its manufacturing is concentrated outside of the US, while the majority of its product sales are in the US market, which will impact its input costs from FY26. More significantly though, we are incrementally cautious towards Breville due to its exposure to a weakening US consumer outlook. 

Elsewhere in the portfolio, we assess only modest impacts for ResMed, Aristocrat and James Hardie, and negligible impacts for CSL and Telix Pharmaceuticals. 

Defensives have unsurprisingly outperformed in this market correction, which has highlighted the key role they play in providing downside protection during periods of market volatility. 

With downside risks to the global economy mounting and macro uncertainty remaining elevated, we continue to see value in increasing the portfolio’s exposure to defensives. In Figure 8, we conduct a fundamental screen of defensives on the ASX 200. 

Woolworths Group (WOW) has been introduced into the Focus Portfolio at a weight of 4%. 

As Australia’s largest (and New Zealand’s second largest) supermarket chain, as well as the owner of Big W and PetStock, WOW benefits from an attractive industry structure (an oligopoly with Coles, Aldi, IGA) and relatively defensive household demand through the economic cycle, given its inherent tilt towards fresh food and other everyday essentials. 

There are several key factors that underpin our conviction in WOW at this juncture:

• Domestic focus – WOW is well placed to navigate the trade war given its predominant exposure to the relatively well placed Australian economy and its locally focused supply chain. Even in the worst-case scenario of an Australian recession (not our base case), WOW is well placed given its acyclical customer demand profile. 
• Regulatory overhang removed – the ACCC inquiry into supermarket pricing and competition had previously kept us cautious over 2024 until now. However, the recent release of the ACCC’s findings into the sector has meaningfully de-risked the investment case for WOW (and COL), with the regulator concluding that the major supermarkets have not been engaging in ‘price gouging’. The ACCC ultimately provided a relatively benign set of recommendations (e.g. greater
  pricing transparency, greater supplier engagement).
• Improving earnings picture supported by profitability focus – after a period of subdued performance amidst cost pressures, execution issues, and industrial action, there is a clear path to accelerated earnings growth over the medium-term. This will be supported by management’s enhanced focus on return on funds employed (ROFE) and its plans to address its inflated cost base (WOW has 2x the headcount of COL).
  WOW has already announced $400m in initial cost-out (annualised run-rate by end 2025) and has an ongoing portfolio review (likely to focus on less profitable divisions including Big W). We expect these measures to support EBIT margin expansion over FY26-27, which underpins a consensus EPS CAGR of ~15% in this timeframe. 
• Valuation discount – WOW trades at a 12 month forward PE multiple of ~23x, which is a discount to its five-year average of ~25x. WOW’s PE is also attractive on a relative basis (vs COL) compared to its historical range (see Figure 9). At these levels, WOW offers attractive value considering an EPS CAGR of ~15% over FY26-27. With improved operational momentum, WOW’s PE multiple should re-rate higher in our view.

Our primary focus in the current market environment is on quality. Critically, we are confident in the balance sheet strength of each of the Focus Portfolio’s 26 holdings, most of which have only a modest level of gearing, if any. 

Moreover, the portfolio is focused on high quality businesses supported by durable competitive advantages, secular growth tailwinds, pricing power, and attractive returns on invested capital. These quality attributes are crucial in what is a deteriorating (and highly uncertain) global macro outlook.

Importantly, we have reduced the portfolio's exposure to global recession tail risks with the removal of Breville and WEB Travel, while our increased weighting in defensives and the gold sector has positioned the portfolio for continued volatility from the rapidly evolving macro environment.