Why retail investors are exposed to a second market crashPatrick DurkinBOSS Deputy editor
Jun 9, 2020 – 12.00am
Retail investors are dangerously exposed to a second major sharemarket correction in August, after analysis revealed the current market optimism does not reflect the dire economic conditions.
EY partner Duncan Hogg, formerly managing director of Bank of America's investment banking team, said he was reluctant to step too far out of his lane to issue the warning, but was detecting alarming signs in the oddly optimistic and irrational equity market.
The
ASX briefly hit 6000 on Friday after a weekly gain of 4.2 per cent and is up 32 per cent from its March 17 low, despite Australia heading into its first recession in 29 years.
The Australian Securities and Investments Commission released a report early last month which warned that COVID-19 was
creating a nation of sharemarket punters that might end in tears.
New retail accountsThe
regulator's report found the coronavirus panic had triggered new retail accounts at 3.4 times the usual rate, as trapped-at-home investors tried their hand at playing the market to make quick profits. But other market players said ASIC's fairly muted warning had fallen on deaf ears.
"We are in a period right now where the market is not fully informed in relation to the earnings of companies who have not been comfortable putting an outlook out there," Mr Hogg told
The Australian Financial Review.
"Everyone is being optimistic based on what is happening with markets overseas including the US.
"We are starting to see a bunch of retail guys coming in given interest rates are at record lows but not really understanding the full impact of COVID-19, which will only become apparent in August and our view is it will probably be worse than the optimism out there reflects."
Mr Hogg said the sharp fall in share prices in February when the COVID-19 crisis spread to Italy and lockdown restrictions began had been followed by a prolonged resurgence, which suggested an "oddly optimistic market".
He said the bounce from the March 17 low was initially driven by the significant government stimulus globally but warned the bounce did not reflect how earnings may be affected given the likely length of the recovery.
Mr Hogg is not sure if the market will hit the lows of the market in February – in effect creating a W shape in performance in contrast to the current V-shaped market – but is firmly of the view that once the full impact is revealed "prices will be impacted in a negative way".
Given most ASX-listed entities gave no earnings guidance in February or subsequently withdrew guidance, "we are currently operating in an earnings vacuum" until August when earnings and balance sheets are revealed.
Bottom of the market"All signals are therefore showing the bottom of the market potentially being August as the market becomes more bearish on the broader COVID impact," Mr Hogg said.
The EY partner also predicts the August reporting period may be the time for increased merger and acquisition activity as opportunistic parties take advantage of lower valuations.
Kerry Stokes’ Seven Group Holdings
acquired a 10 per cent stake in ailing building materials company Boral this month and Wesfarmers chairman Michael Chaney has said his company is also eyeing friendly takeover targets.
Patrick Durkin is Melbourne bureau
