While the local market’s reporting season boosted the ASX200 to its third straight week of gains on Friday, the conversation was not about the sectors delivering ahead of expectation; it was the extreme volatility that spared no one.
The extraordinary movement in share prices from market heavyweights like Woolworths, Commonwealth Bank, BHP and CSL showed that you didn’t need AI exposure to turbocharge the market’s reaction to your stock price.
Barrenjoey quant strategist Jason Swinbourne said the ASX is “experiencing one of the most volatile reporting seasons in history”.
Heading into the final week of reporting, Barrenjoey pointed to financials as the most volatile, with Zip down 35 per cent and AMP dropping 27 per cent, followed by healthcare, with Pro Medicus down a whopping 24 per cent, followed by consumer discretionary, with high-profile Temple & Webster down 33 per cent.
Ten Cap portfolio manager Jun Bei Liu agreed, saying half of the companies that reported this earnings season experienced a share price reaction of more than 5 per cent on the day.
“That is unprecedented,” she said.
“We’ve seen incredible sell off in a lot of software based, technology-based businesses because investors are questioning their long-term future.”
Ten Cap portfolio manager Jun Bei Liu
“Normally, big companies don’t report results that surprise massively on the upside, but … the Commonwealth Bank is up almost 20 per cent for the month.”
This week, Woolworths experienced its best day ever with a 13 per cent surge after showing it was regaining its competitive footing against Coles after years of underperformance.
This was followed by Coles’ 9 per cent drop after its results on Friday.
“Share prices are sometimes signal, sometimes noise,” Morningstar market strategist Lochlan Halloway said. “When an established, moated business with defensive cash flows posts a soft half and is met with a double-digit sell-off— increasingly common in today’s market— the odds favour noise.”
The growing financial influence of index funds, which match the market’s performance by buying stocks on the rise and selling falling stocks, is blamed for amplifying both good and bad news from reporting season. Algorithmic traders were also blamed for the rising volatility.
But Liu also points to the massive – and desperate – rotation from out-of-favour tech stocks to Aussie staples like the banks and miners, saying they’re partly to blame.
“We’ve seen incredible sell-off in a lot of software-based, technology-based businesses because investors are questioning their long-term future,” Liu says.
She said this has caused a “panic” among some fund managers who have charged into market sectors where earnings are being upgraded.
“So if you look at where the earnings being upgraded is the resources, it’s the banks, and especially in the larger caps,” she says.
AMP chief economist Dr Shane Oliver also backed the rotation trade, saying rising profits – led by the miners and banks – are propelling the market higher, despite stretched valuations.
He says the rotation trade is likely to continue to help Australian and non-tech shares, but with the market trading on 20 times earnings, it means further volatility.
“I think we’ll see gains, but it’s going to be fairly rough,” he said.
Liu has a more positive outlook, forecasting an eight to ten per cent return for the year and says investors don’t have to risk exposure to tech stocks to get there.
“We don’t need to actually try to figure out whether software businesses are a good place to be. I just think there are plenty of other sectors that you can look into.”
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Colin Kruger is a senior business reporter for the Sydney Morning Herald and The Age.Connect via email.
