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Dogs of the ASX in for a hard time

In case a softening economy, Nvidia rally and consumer pain didn’t make it hard enough to make money, attention has turned to tax loss selling. There are plenty of candidates this year.
Jun 6, 2024 – 4.00pm


Keep your winner close, and your losers even closer.

It’s dogs of the ASX month – and history says things will get worse before they get better for this year’s laggards.

In June every year, we see tax loss selling. Investors often let some of their poorest performers go, crystallising capital losses that can be used to offset against capital gains made during the financial year and reduce their overall tax bill. Australia’s tax system has encouraged it for more than 20 years.
It makes June a tough month for poorly performed stocks and the ASX as a whole. There tends to be more sellers than buyers; June is the second-worst month of the year for the benchmark S&P/ASX 200, on average, and crystallising losses for tax purposes is part of the reason why.

This year, there is also a softening economy, pressure on households and a handful of earnings downgrades. Language courses business IDP Education was a good reminder of that on Thursday. There are also plenty of bombed-out stocks around.


So, brokers are telling clients to batten down the hatches for the next few weeks.

Yes, the market may be rallying thanks to Nvidia hype, but beware this financial year’s losers lurking beneath the surface. Bell Potter’s Richard Coppleson, who writes about tax loss selling this time of year every year, is warning clients to avoid any stocks levered to the Australian economy, particularly in small caps.

Tax loss selling hits the market in June. AFR
So who is in the firing line for tax loss selling this June?

About a third of stocks in the ASX 200 are sitting on negative returns heading into financial year-end, according to Macquarie’s quantitative research team, which is more than last year, so there are plenty of names to choose from.

We polled domestic small- and large-cap investors, and they came back with a range of companies with cyclical or structural challenges, too much debt, or at the wrong end of the commodities cycle.

In large caps, fund managers are watching out for more selling at Tabcorp (down 45 per cent this year), Healius (down 54 per cent) and Star Entertainment Group (down 55 per cent), which are among the worst performed in FY24.

Surprisingly, they’re also keeping an eye on blue chips Woolworths (down 19.3 per cent), Sonic Healthcare (down 31 per cent) and Telstra (down 17.6 per cent), which have big shareholder bases, tested investors’ confidence this year, and could be used to offset some of the capital gains recorded in bank stocks, particularly at the widely owned Commonwealth Bank of Australia.
Small-cap staples in spotlight

Small-cap managers are looking past the worst performers – commodities players including Sayona Mining, Core Lithium and Chalice Mining, all down 75 per cent or more since last July – saying the selling there may be done already.

They’re thinking about small-cap staples Eagers Automotive (down 24.8 per cent), scrap metal group Sims (down 32.4 per cent) and markets software provider Iress (down 22.5 per cent), and are wary of consumer-facing stocks more generally. Retailers Kogan, Bapcor, Eagers and Baby Bunting have already warned about trading conditions.

If the tax loss selling steps up – and history suggests it will – it would make for a tricky month; investors are already worried about a potential recession in the US, digesting Australia’s slower-than-expected economic growth and trying to miss late-year earnings downgrades.

The good news is that the tax loss selling trend also tends to reverse in July, as risk appetite improves and investors hunt for value knowing the balance date selling wave should have passed.
If you like to think of stocks in buckets – like a quant investor – that means low momentum stocks and high-risk/low-quality stocks are shipped out in June, and come back into favour as risk appetite improves in July.

Macquarie’s quant team did the numbers along those lines: it is tipping a tough June for lithium plays Liontown Resources and IGO Ltd, Domino’s Pizza Enterprises, Pilbara Minerals, Iluka Resources, IDP Education and Evolution Mining.

Macquarie says the other side of the trade should be good momentum-low volatility stocks outperforming, including National Australia Bank, News Corp, Wesfarmers, Ventia Services, Westpac Banking Corp and Bendigo & Adelaide Bank.

Macquarie reckons market conditions indicate “a normal environment, conducive to a typical trading pattern for this year”, so the pattern should continue. It told clients its tax loss strategy had produced positive absolute returns in 21 of the past 23 years.