Will we be navigating a Bear Market in 2025?
- Royce Advisory
- Apr 7
- 4 min read
At the time of writing, investment markets are on edge: global trade disrupted by steep tariffs, consumer spending in the world’s largest economy faltering, and equity indices retreating from their highs. This is the reality facing investors in the early part of 2025. The
ASX 300 has declined 10% since its February peak, while the S&P 500 has shed 12.2%—a direct response to higher-than-anticipated Trump administration tariffs averaging 23% and a weakening US economic outlook.
Many market analysts, are now warning of a looming bear market, with the ASX potentially sliding to lows of 6,800 and the S&P 500 to 4,900. (these forecasts from Macquarie as an example)
Yet, amid this turbulence lies opportunity. For Australian investors—whether managing direct shares, exchange-traded funds (ETFs), or managed funds—these conditions demand a strategic response. A bear market, defined by a 20% or greater decline, tests resilience but also rewards preparation.
Issues for investors to consider in current sell off
1. A Bear Market Looms—Proactive Preparation Is Essential
The combination of elevated tariffs and a slowing US economy amplifies downside risks. Markets forecast a transition from the current “topping” phase to a full decline within weeks, driven by global growth headwinds and domestic vulnerabilities. The ASX 300’s 10% drop since February is a warning shot, and further declines could erode portfolio values significantly.
Actionable Strategy: Assess your portfolio’s exposure to risk. Holdings heavily weighted toward growth-oriented or cyclical sectors—such as discretionary retail or banks—may require rebalancing. Increasing allocations to cash or low-volatility assets, such as bond-proxy ETFs, can provide stability during this period of uncertainty.
2. Defensive Sectors Demonstrate Resilience
Since the ASX’s February high, defensive sectors have outperformed their cyclical counterparts. Data highlights Telecom (e.g., Telstra), Utilities (e.g., APA Group), Gold (e.g., Newmont), Insurance, and Staples Retail as leaders, reflecting their stability amid economic softening. These sectors benefit from consistent demand, regardless of broader market conditions.
The following table illustrates their recent performance:
Sector | Total Return Since Feb High | Type |
Telecom | 8.9% | Defensive |
Utilities | 7.3% | Defensive |
Gold | 6.2% | Defensive |
Insurance | 5.0% | Defensive |
Staples Retail | -1.2% | Defensive |
Actionable Strategy: Reallocate capital toward defensive sectors. Direct investments in companies like Telstra (TLS) or Coles (COL) offer reliable returns, while broad-based ETFs targeting Australian dividend-paying stocks can enhance diversification. Gold-related assets, such as those tied to Newmont (NEM), merit consideration as a hedge against volatility.
3. Growth Stocks Face Valuation Pressure
Stocks that fueled 2024’s rally—particularly those with high valuations—are under strain. Growth stocks, such as Commonwealth Bank (CBA) with a price-to-earnings ratio of 25x, are de-rating at three times the pace of value stocks. The premium for growth over value has contracted from 19.5 to 15 turns, with further compression anticipated. This chart captures the trend:
Actionable Strategy: Reduce exposure to overvalued growth stocks. If your portfolio includes names like CBA or other high-multiple industrials, consider shifting toward undervalued opportunities.
4. Defensive Valuations Remain Undervalued
Despite their outperformance, defensive sectors trade at a modest premium of 0.4 turns over cyclicals—a level we deem insufficient given the growth outlook. Historically, during US recession fears (e.g., 2022), this premium reached 6 turns. A range of 2-4 turns appears more justified as risks mount. This chart underscores the gap:
Actionable Strategy: Capitalize on this mispricing. Increasing your weighting in defensive sectors—particularly healthcare (e.g., CSL), utilities, and telecom—positions you to benefit as their valuations adjust upward. This shift strengthens portfolio resilience while capturing potential gains.
Implications for Portfolio Construction
These dynamics necessitate a deliberate approach to asset allocation. Consider the following adjustments:
Boost Defensive Exposure: Allocate 20-30% of your equity portfolio to defensive sectors like healthcare, utilities, and staples for stability.
Limit Growth Overhang: Cap growth stocks at 10-15%, particularly those with stretched valuations, to mitigate downside risk.
Incorporate Hedges: Assign 5-10% to gold or cash equivalents to buffer volatility.
Preserve Flexibility: Retain 10-15% in liquid assets to capitalize on undervaluations as the market declines.
Conclusion: Fortify Today, Prosper Tomorrow
The outlook for 2025 is challenging, with Trump tariffs and a faltering US consumer paving the way for a bear market. However, this is not a time for retreat but for strategic action. Defensive sectors offer a foundation of strength, undervalued today yet poised for appreciation. Meanwhile, the unwinding of growth valuations and a fearful market sentiment signal opportunities for those prepared to act. By fortifying your portfolio now—prioritizing resilience and maintaining flexibility—you position yourself not just to endure the downturn, but to emerge with enhanced wealth when the cycle turns.
Royce Advisory Pty Ltd (ABN 43 622 402 706) is a Corporate Authorised Representative (CAR) of MB Capital Partners Pty Ltd (AFSL 536053). This article, commentary and discussion is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or particular needs. You should consider whether the information is suitable for your circumstances and where uncertain seek further professional advice.
This communication is based on information from sources believed to be reliable at the time of its preparation (April 2025). However, despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice and neither Royce Advisory or MB Capital Partners is not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.
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