A woman is seen in the reflection of a window looking at shares' performance on a board of the ASX

ASX selloff is a ‘real downturn’ and near 50/50 global recession risk, analyst warns

It might seem a bit strange that global markets are going through a meltdown due to fears of a potential recession over the next couple of years, especially given the strength of the economy.

Last week, the ASX 200 fell 6.6% – its worst fall since the March 2020 COVID-19 crash.

The Australian equity market is undergoing a correction, having fallen more than 15.5% from its record high in August last year.

To be classified as a “bear” market, it will need to fall at least another 4.5%.

Meanwhile, on Wall Street, the S&P 500 and Nasdaq are deep in bearish territory, having fallen more than 20% and 30%, respectively, from their all-time highs.

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Australia’s super boss says a recession is coming.

Over the past few months, the Reserve Bank, the US Federal Reserve and their global counterparts have raised interest rates aggressively to bring down the cost of living, which has risen at its fastest pace in many years. decades.

They also cut billions of stimulus dollars they had pumped into their COVID-ravaged economies over the past two years – a move that caused their economies to overheat and bubbles to emerge in stock markets, real estate and cryptocurrency. .

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

“It’s not just the sentiment. Higher rates mean you should pay less for stocks (stocks).

Gemma Dale of Nabtrade
Gemma Dale says the current business environment is particularly risky.(ABC News: John Gunn)

“Any business with high debt is going to perform poorly and a higher interest rate environment,” Ms. Dale said, referring specifically to unprofitable tech and buy now, pay later businesses.

On the other hand, she is more optimistic about stocks of infrastructure and toll roads.

“Any company that can pass its increased costs directly to the consumer, without a significant drop in volume…really is a good company to watch.”

“Too early” to say that the markets have bottomed out

The equity market is going through an increasingly volatile period as there is considerable debate over the speed and extent of the rise in interest rates by the RBA and its global peers.

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However, it is difficult for central banks to achieve a “neutral rate”. It’s a great place where they don’t boost the economy or slow it down either.

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

The Fed has “never been able to correct” even lower inflation and employment overshoots “without pushing the economy into a significant recession,” according to Deutsche Bank, which predicts a major recession for United States.

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

“Anyway, it’s still too early to say that stocks have bottomed out.”

Beware of “dead cat bounce”

Although the market is sinking further into a “correction” or “bear market” phase, some market experts caution against “buying the dip”.

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