4 market shock scenarios and the 40 stocks that will be rocked

For more than 70 years, the world has enjoyed an extraordinary period of growth and stability. Since 1990, the World Bank estimates that 1.5 billion people have been lifted out of extreme poverty, driven by the spread of capitalism, globalised trade, and a geopolitical order underwritten by NATO and U.S. leadership.

As we commence the new year, it is increasingly plausible that this era has peaked.

The United States, architect and chief steward of the post-WWII order, is retreating from many of the principles it once championed. After decades advocating free trade and democratic norms, the U.S. has lifted its effective tariff rate to the highest level since 1939 and, at times, embraced authoritarian regimes over democratic allies.

Recent developments would have been unthinkable only a few years ago. The Trump administration is openly determined to acquire Greenland, a NATO member territory. If successful, it would represent the largest territorial expansion of the U.S. since the Louisiana Purchase, which brought fifteen states into the Union. In recent days, Trump has even threatened 10% tariffs on European allies unless they acquiesce.

Overlay this with the dramatic capture of Venezuela’s dictator Nicolás Maduro and his wife, accompanied by claims the U.S. will indefinitely control Venezuela’s oil reserves, and it is easy to understand why investors are increasingly uneasy about international exposures.

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At the same time, markets must grapple with the risk that China feels emboldened, not necessarily to invade Taiwan, but more plausibly to blockade it, with catastrophic consequences for global trade and the technology supply chain.

Amid all this, hard-headed economists argue that the most immediate threat to markets is not aggressive U.S. foreign policy, which, to be fair, has ample precedent (Iraq, Afghanistan, and Panama vis-a-vis Manuel Noreiga capture), but the assault on the independence of the Federal Reserve, highlighted by the Department of Justice launching a criminal probe into Chair Jerome Powell.

Some might say ignore the noise, others will argue a new global order requires a complete overhaul of your investment strategy.

What’s our view?

Undeniably, the current macro and geopolitical uncertainty carries real investment implications and none of the major developments mentioned above can simply be ignored.

However, they should not, in and of themselves, trigger wholesale changes to a long-term equity investment strategy.

Protect, don't predict

Major macro and geopolitical developments are not events to be traded or timed. It's our strong view that attempting to forecast macroeconomic or geopolitical shocks is a poor basis for investment decision-making.

As active long/short investors, our efforts are better directed toward delivering strong long-term capital growth, while ensuring portfolios do not suffer outsized drawdowns when inevitable shocks occur. 

To understand how the inevitable will impact our portfolios, we consider a range of plausible stress scenarios that could impact stock markets (not predicting when or even if they’ll happen at all) and ensure our downside exposure to these events is limited.

Long term Plato Global Alpha Fund investors may recall our 2024 investor letter, where we discussed protecting portfolios amid a similarly volatile environment and demonstrated how consensus thinking is rarely accurate.

The 2025 letter noted our systems were conducting 57 daily macro and geopolitical stress tests of our portfolios, ranging from a deepening of the Chinese property downturn (remember when everyone was talking about China Evergrande), to a collapse in Lithium prices, and shocks in inflationary expectations and US high yield credit. 

Using our proprietary PRISM system, these tests are similar to the way systemically important banks stress-test their loan books.

As we enter the new year, that number of daily stress tests has increased to 96.

Most of the scenarios we listed in 2024 remain, alongside updated and new scenarios such as surprise election outcomes, U.S. banking contagion, escalation of China-Taiwan tensions, and escalations in tariff wars.

Again, we are not predicting any of these, and certainly not trying to time any major market events. We are simply investing our clients’ capital where we see exceptional long and short opportunities, while at the same time ensuring if any of the 96 stress events do occur, your capital will not be impacted by outsized drawdowns.

It’s all about protection, not prediction.

To demonstrate this process in practice, we have selected four topical stress-test scenarios to share with investors and we highlight the companies our risk framework identifies as most likely to experience outsized share price moves should these scenarios materialise.

*The following are for illustrative purposes only, and should not be considered investment recommendations.

1) Acceleration of U.S. rate cuts: gold still shines - but less brightly

Political pressure on the Federal Reserve to cut rates is unprecedented. Historically, falling real yields have been supportive for the equity market and for gold.

In the scenario of rapid rate cuts, gold miners, many of which are Australian, dominate the winners, though the magnitude of upside is notably smaller than 12 months ago, perhaps reflecting already elevated gold prices.

2) Return of full-scale trade wars

Trade wars have been a portfolio stress event now for several years. Of note, the threat of intensifying trade wars is back on as we write this investor note (in January) with the US and Europe locking horns over Greenland.

Whether you’re a believer in ‘TACO’ or ‘FAFO’, these are the European stocks facing outsized declines should a full-scale trade war between the US and Europe erupt. Autos and Semis will likely bear the brunt.

3) Rapid AUD devaluation: an under-appreciated geopolitical risk

It is not implausible that an increasingly assertive U.S. foreign policy in the Western hemisphere encourages China to act more forcefully in its own backyard.

Prediction market Polymarket currently assigns a 9% probability to a Chinese invasion of Taiwan by year-end. Following Maduro’s capture, Chinese social media lit up with suggestions that U.S. actions provided a blueprint for Taiwan, content viewed hundreds of millions of times.

Any such event would be a humanitarian tragedy first and foremost.

From a market perspective, Australia and the AUD would be crushed. This is an underappreciated risk, certainly for Australian investors with a strong home bias.

Below are the companies we estimate to be most sensitive to a sharp AUD devaluation.

4) A Significant ASX correction: domestic market priced for perfection?

And finally, The ASX 200 has risen roughly 46% over the past three years, including dividends. One might reasonably assume earnings growth has been robust. In fact, aggregate ASX 200 earnings have fallen by approximately 15% over that period.

This disconnect raises an obvious question: which stocks are most exposed if the ASX corrects sharply?

Staying invested

The above are just four examples to help illustrate our risk management process designed to protect your capital.

Ultimately the adage, time in the market beats timing the market, is a philosophy that continues to stand the test of time. But we respect the fact that client circumstances are different.

When major drawdowns come at the wrong time, there can be serious implications for your wealth. This is why thorough and sophisticated risk management is central to our investment process.

This discipline has served our clients well to date. 

Since inception in September 2021, the Plato Global Alpha Fund has generated 25.36% per annum in absolute returns, outperforming the MSCI World by 13% per annum after fees, with downside capture of just 62% (to 31 December 2025) , preserving capital during market drawdowns while still delivering strong long-term performance. 

Learn more about the Plato Global Alpha Fund

Dr David Allen is the portfolio manager of the The Plato Global Alpha Fund, a long/short global equities portfolio with an all-weather investment approach that seeks to deliver consistent returns by investing in a diversified portfolio of value, growth, and quality companies across global markets. 

The Fund is available as a managed fund or via an ASX-listed active ETF - the Plato Global Alpha Complex ETF (ASX: PGA1). Learn more about opportunities to invest here: (VIEW LINK)

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