After a horror October so far, the Aussie sharemarket is the cheapest it’s been since 2015. The benchmark ASX 200 index is trading on a 12-month forward price-to-earnings ratio of 14.7 after starting the month at 16, according to JP Morgan. That is well below the three-year average P/E of around 16.2, but it’s pretty much bang on the longer-term average. So what is the message we should be taking away from the falls? Markets rarely communicate clear “buy” or “sell” signals, so let’s take a look at the entrails to see whether we can get a glimpse of the future. It’s no surprise that the most expensive stocks – the ones that exploded through August reporting season – have suffered the biggest reversal in October, copping a P/E contraction of 7.2 points.
Let’s focus on the exchange’s new breed of tech darlings – Wisetech, Appen, Afterpay, Altium and Xero, the so-called WAAAX stocks. They have been smashed. Share price falls month-to-date range from 11 per cent for Xero to 28 per cent for Afterpay, against the ASX’s 4.3 per cent drop.
For fans of the 1980s movie The Karate Kid, I’m tempted to call this the “Mr Miyagi trade” – WAAAX on, WAAAX off. By sectors you can see a similar pattern – the priciest corners of the market have suffered the most in this month’s falls. The IT sector has dropped 7 per cent, while healthcare has lost 5.9 per cent. Investors who have been steering clear of pricey stocks such as the tech names or even the indomitable CSL (which has also de-rated heavily) may be feeling some sense of satisfaction. But really, unless you are a fund manager who gets paid on relative performance, it would be cold comfort.
All sectors down
That’s because every sector of the ASX has recorded losses in October. Unless you were in gold miners, you got caught out. The best performers by sector were consumer discretionary names, down only 1 per cent in October, with the 2.3 per cent loss for utilities the next best performers.
So what now? As Mr Miyagi would say: “Don’t forget to breathe; very important.”
It’s worth noting that the recent sell-off has left around three in 10 of the top 200 stocks within 5 per cent of 52-week lows, on JP Morgan numbers again. Matching some of these against the broker’s “overweight” recommendations highlights a number of opportunities in a long list of out-of-favour names: Regis Healthcare, Stockland, Westpac, NAB, ANZ and AGL Energy all trade within 1 per cent of one-year troughs and earn the top rating from JP Morgan analysts. Spark Infrastructure, Transurban, Star Entertainment and Automotive Holdings are within 2 per cent and are similarly favoured.
Nathan Parkin of Ethical Partners Funds Management is similarly inclined to see more opportunities than risks from the sell-down. The turmoil has “shaken people out of positions at the wrong price for them and at the right price for us” is how Parkin puts it. It’s not often that you get a chance to top up your positions across your portfolio at a good price, but now is one such time, he says. Parkin is not as gloomy about the housing market as many, and sees great value in building materials firm CSR and has added to his position in recent days.
“These periods are opportunities provided you know what you are buying,” Parkin says. The JP Morgan strategists remain upbeat on the ASX overall, saying it’s cheap versus its three-year average and are sticking with their 6500-point target, which is around 10 per cent higher from here. Their peers at Morgan Stanley are less optimistic, with the ASX 200 index trading pretty much in line where they think it should be by June of next year. The broker is a lot more cautious on the banks, for example, and is generally avoiding housing-related stocks.
More broadly still, the recent market ructions can really be put down to the unwinding of positions following years of easy money as the US Federal Reserve pushes the global risk-free rate higher. And it’s likely just the beginning. Investors for years have chased growth in a low-growth world, and the ASX has been no exception. For example, the losses in recent weeks pales in comparison to the money that has been made in WAAAX stocks since the start of the year. Afterpay is still up 150 per cent in 2018 and Xero, the most sedate of these names, is ahead by 40 per cent.
That’s not to say that they won’t climb higher, but it is clear that investors around the world are going through a period of price discovery – how much are we willing to pay in an environment of climbing yields and slowing global growth? For Parkin, chasing growth is not the way to go. He’s happy to buy companies which the market has branded low growth (with earnings growth expectations of 5 per cent or below) but which have solid fundamentals and the potential to pleasantly surprise investors.
This has been seen as an old-fashioned and unrewarding approach to investing over the past 18 months. Investment professionals love to trot out the old clichés, and in recent weeks almost every single one I have spoken with has used that old Warren Buffett classic: “You only find out who is swimming naked when the tide goes out.” Normally I would groan. This time, I think they might be on to something.