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Global Markets Rally Amid US-China Trade De-escalation
A significant easing of trade tensions between the US and China has revitalised global equity markets, with the S&P 500 recovering its year-to-date losses, leading to a remarkable V-shaped recovery in the Australian market since the lows recorded in early April.
On Tuesday, the S&P/ASX 200 index rose by 0.43%, closing at 8,269, marking its highest point since February 28. This reflects a remarkable increase of approximately 13% from its low on April 7.
Divergent Sector Performance
Despite the overall strength of the index, sector performances varied substantially. A risk-on approach prompted investors to utilise funds from defensive sectors such as telecommunications (-0.7%), real estate (-1.1%), and consumer staples (-2.6%). In contrast, growth-focused sectors saw positive movements, including technology, which surged by 3.3%, and energy, which rose by 3.0%. Noteworthy declines were observed in stocks like Coles and Woolworths, both dropping by 3.5%, alongside Telstra, which fell by 2.6%.
Defensive Stocks Under Pressure
Analysts at Macquarie indicated that defensive sectors like supermarkets, gold stocks, and telecommunications, which thrived post the ‘Liberation Day’ announcement on April 7, may face challenges in the short term.
During the sharp sell-off on April 7, where the S&P/ASX 200 dropped by 4.2%, these defensive sectors exhibited resilience, falling only 0.9% for telecommunications and 1.8% for staples. They managed to cushion losses during a subsequent decline of 1.8% on April 9, with these sectors declining a mere 0.7% and 0.6% respectively.
Two Analytical Perspectives
The recent sluggishness in defensive stocks can be interpreted through two perspectives:
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Mean Reversion: Given the recent easing of macroeconomic uncertainties, defensive stocks, which previously enjoyed strong demand, are now witnessing a return to more typical valuation levels.
- Market Rotation: With the outlook for US trade improving, along with lower-than-expected inflation rates and optimistic economic forecasts, investors are transitioning from traditionally defensive stocks, known for stable earnings amid volatility, to growth sectors like technology, which promise higher upside.
Recent Performance Trends
Following the April 7 announcement, defensive stocks including Woolworths, Coles, and Telstra achieved several consecutive year-to-date highs, while the broader market took about three weeks to reach breakeven levels.
As concerns over tariffs began to ease in early May, the ascent of these defensive stocks ceased, while the Information Technology Index experienced a robust recovery. Nonetheless, while Coles and Telstra have recorded gains exceeding 10%, the Tech Index remains slightly down year-to-date.
Sound Fundamentals
Despite the underperformance in early May, defensive stocks such as Telstra, Coles, and Woolworths continue to demonstrate solid fundamentals, with most recent earnings reports exceeding market expectations.
Telstra (ASX: TLS) shares have surged around 15% since its half-year FY25 result announced on February 19, driven by better-than-expected EBITDA thanks to effective cost management. Although net profit after tax (NPAT) slightly missed expectations due to higher depreciation and amortisation costs, key highlights included a 5.6% increase in interim dividends and a $750 million on-market buyback, with management optimistic about sustained dividend growth. Strong free cash flow and disciplined capital management have bolstered positive sentiment, with upcoming strategic updates anticipated to provide additional momentum.
Coles (ASX: COL) has outperformed Woolworths significantly over the past 18 months, stemming from its positive FY24 results in August 2024. These results addressed operational challenges, with initiatives like ‘Simplify and Save’ and new customer fulfilment centres significantly improving performance. The stock skyrocketed as much as 42% between its mid-February 2024 half-year results and May 12, 2025.
Conclusion
The volatility linked to tariffs and shifting macroeconomic conditions propelled demand for defensive stocks, elevating their valuations to relative highs. As these factors abate, investors appear to be rotating back toward growth sectors, thereby reclaiming some of the recent gains made by defensive equities. Nevertheless, Telstra, Coles, and Woolworths remain robust, delivering strong returns year-to-date and showcasing solid earnings that position them as resilient options despite their recent pullbacks.
