Its Over

...I often said that we do not wait for the narrative to get into mainstream before acting.

...yes, ASX market participants have been complacent; just because ASX stood more resilient as Wall St crumbled, we were led to believe such resiliency is here to stay for longer. It has been amazing that ASX could still be above 7000, but I should think the days are numbered for that. Brace for ASX to even underperform Wall St to catch up.

ASX faces bear market on dimming outlook
Alex GluyasMarkets reporter
Jun 1, 2022 – 1.36pm

The Australian sharemarket is destined to follow Wall Street into bear market territory, fund manager T. Rowe Price has warned, as investors underestimate the damage tightening monetary policy will inflict on corporate profits in the coming year.

Australian shares have held up better than international markets this year. The S&P/ASX 200 has fallen 3 per cent in 2022, while the S&P 500 benchmark of US blue chips has dropped 13 per cent, and even slipped briefly into a bear market - a decline of a fifth from the peak - in the middle of May.

However, Baltimore-based T. Rowe, which manages $US1.5 trillion ($2.1 trillion) in assets, believes larger losses loom for local shares and that earnings expectations are not pricing in the deterioration in demand caused by rising interest rates and surging costs due to inflation.

The effects of these risks were seen during Wall Street’s most recent earnings season where major retailers such as Walmart and Target described how quickly surging inflation has hit consumer demand and eaten into company profits.

T. Rowe Price’s head of Australian equities, Randal Jenneke, believes Australia is lagging the US by three to six months because the Federal Reserve became hawkish earlier than the Reserve Bank.

The Australian market has entered a period that will be dominated by earnings downgrades, according to Mr Jenneke, who anticipates the benchmark index may drop another 10 per cent to 15 per cent over the next six months.

“Once the US goes into a bear market, other equity markets generally follow, so it would be surprising if the Australian sharemarket didn’t follow because the issues facing both countries are the same,” Mr Jenneke said.

“The Federal Reserve is doing the same as the Reserve Bank is doing here; it’s out tackling inflation and bringing down demand. When demand falls, earnings fall, and then multiples come under pressure.”
Incoming recession

Macquarie echoed those concerns in fresh research on Wednesday, warning that rising rates will remain a headwind for stocks heading into 2023, and that a series of earnings downgrades lie ahead.

With 29 out of the 37 major central banks lifting interest rates over the last three months – the highest proportion since 1992 – the broker believes that while a US recession is unlikely in 2022, the scale of monetary tightening could be enough to cause a “mild recession” in the first half of 2023.

Mr Jenneke agreed that a US recession is probable, which historically means that Australia is likely to follow.

“If there is a US recession in calendar 2023, ASX equities will not be immune, but we think Australia could outperform US equities,” the broker said.

However, Macquarie cautioned that the Australian sharemarket’s decline this year isn’t over yet, urging investors to resist the temptation of buying beaten down stocks for now.

“We maintain our view that it is too early for investors to buy the dip, as valuations remain high and earnings per share estimates are also high,” the broker said.

“It’s usually better to buy when EPS revisions are highly negative, and this point may not be reached until 2023,” which may fall “in the middle of a recession,” according to Macquarie.
Batten down the hatches

Macquarie remains overweight resources and defensive stocks, noting that healthcare, consumer staples, utilities and real estate investment trusts tend to have the most resilient earnings in a recession.

Meanwhile, Mr Jenneke said T.Rowe Price’s Australian equity fund is the most defensively positioned it has been for over six years, excluding the pandemic.

The firm believes that quality stocks, which it describes as companies that possess higher profitability with lower earnings volatility and strong balance sheets, will perform well amid rising cost pressures and weaker margins.

The portfolio is overweight consumer staples and healthcare stocks, and underweight mining, energy, financials and domestic cyclicals.

Mr Jenneke remains particularly concerned about the valuations of the major banks.

“I think people are very complacent about the banks. Commonwealth Bank is a great bank and great franchise but now it’s trading at close to 20 times earnings,” he said.

“That’s just ridiculous for a bank going into downturn with house prices about to fall. It strikes me as the wrong multiple to be paying even before you get the earnings.”