ASX sell-off opens door to bargains, house prices face falls, market strategists warns

Poleaxed tech and healthcare businesses may offer good value across a share market rocked by fear around rising interest rates, inflation and the hit from Labor’s plans to hike capital gains tax.

Since the May 12 Budget, the S&P/ASX 200 is down two per cent across six sessions to close at 8476 points on Wednesday, with worries around sinking property prices and falling corporate profits at the top of investors’ minds.

Australian 10-year government bond yields have also jumped 61 basis points over the past 12 months from 4.45 per cent to 5.06 per cent on Thursday, as interest rate traders expect higher-for-longer inflation that the Reserve Bank now forecasts to reach 4.8 per cent in the June quarter.

Share picks

Damien Boey, a Portfolio Strategist at Wilson Asset Management, said the growing gloom spells potential opportunity for share market investors prepared to back out-of-favour companies such as healthcare giants CSL and Cochlear. Or companies investing heavily for the future at the expense of current profits, such as data centre players NextDC or Goodman Group.

“Even though everyone is talking about rate hikes and inflation, if you think bond yields are actually going to fall soon these (companies) are a great proxy for that play,” said Mr Boey.

“In the share market now, the elephant in the room is healthcare. It’s been known as a quality growth sector, but everyone’s questioning whether it still is given the huge falls in CSL and Cochlear.”

Mr Boey said investors should position for a peak in interest rates and bond yields sooner than the market expects because the economy and demand is already slowing rapidly. He pointed to corporate Australia already issuing a dozen or so warnings about lower than expected profits since the Middle East conflict in late February.

Companies across the housing, travel, agriculture, retail, banking, logistics and healthcare sector have all warned of slowing demand or rising costs hitting their sales and profits over the six months to June 30.

Among them are Commonwealth Bank, NAB, Brambles, Qantas, Webjet, Graincorp, and consumer-facing retailers like JB Hi-Fi and Woolworths.

“So you’ve got to look for companies resilient to the rate hiking cycle and then look at growth at a reasonable price if you think the RBA ends up cutting rates next year,” Mr Boey said.

“A lot of high-quality growth stocks like Goodman Group or NextDC now look interesting to us.

“And you think about the alternatives, are you going to buy retailers in a rising interest rate environment? Probably not.

“Banks? Probably not.

“So, even if interest rates have peaked all those cyclical sector companies are still vulnerable to a profit hit.”

Property prices tipped to fall up to 6pc 2027

Mr Boey also warned that the Budget is set to damage an already softening housing market.

“Pretty much every property indicator is looking weak right now,” he said.

“Clearance rates are very low and loan approvals are falling. That’s before you consider the negative impact from tax changes on the property market and credit growth.

“Our view is property investors will also be hit and buyers subside.”

HSBC’s Chief Economist for Australia & New Zealand, Paul Bloxham, now expects national house prices to fall between 3 and 6 per cent in 2027 as higher interest rates lower the capacity of borrowers.

Australia & New Zealand Bank sees house price growth of 2.8 per cent this year, easing to 2.1 per cent in 2027 at a level below forecasts for price inflation.

In April house prices in Sydney and Melbourne both fell by 0.6 per cent, although the other capital cities posted marginal growth, according to Cotality data.

“If you do have a fall in house prices, cyclical slowdown in the economy, and fiscal restraint from the Budget, it’s not a surprise that people are thinking about peak rates in Australia,” said Mr Boey.

Miners tipped to outperform

Shares in Australia’s largest home loan lender, Commonwealth Bank, are down 5.2 per cent since the Budget on May 12, although heavyweight miners BHP Group and Rio Tinto are only marginally lower after pulling back in value on Wednesday.

On Monday, broker Morgan Stanley said investors should rotate out of banks and into miners as inflation boosts commodity prices and rising interest rates slow lending growth at the major banks.

Morgan Stanley still expects gains from miners in the copper, lithium, oil, gas and iron ore space to lift the S&P/ASX 200 Index to 9250 points by June 2027, up 9.2 per cent from its May 20 level.

“Between now and then, there will be much to digest as earnings pressure from domestic-exposed stocks linked to policy focus builds, while materials and energy sectors do the heavy lifting,” Morgan Stanley said.

Bond yields rise

The surge in Australian and global bond yields in 2026 has also worried investors due to it pushing up the cost of governments’ interest bills.

In Australia, the 10-year government bond yield is now at its highest since 2011 as bond investors demand higher returns to fund public spending.

Thursday’s 43 basis point gap between the Australian 10-year bond yield at 5.07 per cent and US 10-year bond yield at 4.63 per cent is also near its widest since 2022. Bond prices fall when borrowing costs rise, and vice versa.

Billy Leung, a Senior Investment Strategist at Global X, said Australia’s government needed to pay higher interest costs on its debt, despite the Budget narrowing the nation’s fiscal deficit to 1 per cent of gross domestic product (GDP) in fiscal year 2027.

That outlook means Australia boasts one of the most balanced national budgets in the developed world.

The nation’s gross debt of around $1 trillion is also at 34 per cent of GDP, relatively lower versus other advanced economies that often top 100 per cent.

“But in Australia inflation is higher than the US and very sticky,” said Mr Leung.

“There is also some unease about public sector spending.

“That said, Australian yields are also rising for the same reasons as in the rest of the world.

“So, the Middle East conflict and inflation shock from energy prices. I’d say about half of the move higher in Australian bonds is domestic reasons linked to inflation and government spending, but the other half is really external factors like the Middle East.”

The Australian dollar is down 1.5 per cent over the past week to buy US71.6 cents on Thursday, although it’s still up 10.3 per cent over the past six months versus the greenback. The dollar’s advance is in line with the nation’s cost of debt rising faster than other developed nations.