It's been a turbulent week in markets, to say the least.
US investors panicked on Monday night after awful inflation numbers were revealed, which the Australian market replicated on Tuesday.
Then Wednesday night the US Federal Reserve ratcheted up interest rates by an eye-watering 75 basis points.
That added to the pain here in Australia from a 50-point hike just a fortnight ago.
So what will happen to ASX shares from here?
T Rowe Price Group Inc (NASDAQ: TROW) head of Australian equities Randal Jenneke took a stab at how it could play out over the next few months.
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Although the markets agreed that inflation is out of control and central banks are right to try to tame it, the magnitude of action required without triggering a recession is notoriously difficult to judge.
"In 75% of rate hiking cycles since the 1950s, a US recession has followed," said Jenneke.
"Australia, as a small, open economy, was only able to avoid following suit in three out of the last 11 US recessions."
The bright side for ASX shares is that Jenneke expects it to outperform other markets for the rest of this year.
"Australia will likely benefit from increased exports of liquid natural gas and coal to Europe due to tighter sanctions on Russian energy," he said.
"At the same time, more fiscal stimulus to support growth in China could help to support the price of iron ore, even as the global economy slows."
The Australian market "currently looks cheap", according to Jenneke, so global capital has been flowing into the ASX.
"Australia's cheapness partly reflects its composition and the greater share of value sectors in the index. It also reflects the fact that the RBA was less enamoured with quantitative easing policies after the global financial crisis and more recently in response to the coronavirus pandemic," he said.
"As a result, Australia has created less excess local liquidity to distort domestic equity valuations."
ASX growth shares to make a comeback
Growth shares have suffered greatly over the past six months as investors turned away from them due to the prospect of rising interest rates.
But Jenneke feels like the tables will turn in the second half of the year.
"As the year unfolds and recession fears multiply, value stocks are likely to feel the most pressure," he said.
"For the second half, we expect quality growth stocks to perform better in the face of a continuing earnings slide."
Specifically, the T Rowe Price team has increased its investment in "defensive growth", which typically is seen in sectors like consumer staples and healthcare.
The revival of ASX growth shares will come as markets move on from the current obsession with inflation and interest rates.
"After a period of stagflation, we believe recession risks will come to dominate equity markets in 2023," said Jenneke.
"We believe it is better to prepare for what is likely to come in 2023 — slowing growth and rising recession risks — rather than to dwell on what stares us in the face today."
Even though net interest margins for the big banks will increase as interest rates head north, Jenneke would stay away from those ASX shares.
"Their earnings may look reasonable now, but they have the potential to weaken sharply in six to 12 months' time when rising non-performing loans as a result of slower growth outweigh the benefits of wider net interest margins."
