Well, that was quick: in the blink of an eye the Aussie stockmarket has lost close to three months of hard-earned gains. Seven consecutive days of falls have lopped 210 points, or 3.3 per cent, off the benchmark S&P/ASX 200.
Against the odds, the Aussie bourse has been among the few to have climbed in 2018. Suddenly that boast is under threat. This week ended with the S&P/ASX 200 measure only 79 points – essentially a couple of bad days – away from sinking into the red for the year.
What’s going on?
The fact that there have been more sellers than buyers is the only thing we can be sure of. So let’s speculate.
First off, a striking feature of the recent reporting season was a crowding into the already expensive stocks of companies which offer higher growth prospects – most notably a crew of smaller tech stocks, but also healthcare names.
The top 20 per cent of the S&P/ASX 300 by valuation enjoyed a 4.2-point lift in their price-earnings ratios on average through August. The next most expensive quintile of stocks enjoyed a re-rating equivalent to only 0.8 points of P/E. The cheapest stocks stayed that way, with a mere 0.3 points of uplift in valuations.
This enthusiasm to pay even more for the most expensive stocks through August was “in and of itself an extraordinary move,” noted JP Morgan equity strategist Jason Steed, who provided the figures mentioned here. But the moves were “made much more” extraordinary by the fact that earnings for this group of expensive names actually fell on average.
No surprise, then, that some of this heat is coming out of the market darlings. Afterpay Touch Group, for example, more than doubled through July and August, but is down around 25 per cent in the recent sell-off.
The IT sector jumped 10 per cent over that period, but is at the foot of the sector table in the recent downturn, down 6 per cent. Perennial favourite CSL powered the ASX gains into and through the reporting season as it climbed 15 per cent, only to be the biggest weight since, falling more than 5 per cent.
Of course, the bulk of the drag on the index in this sorry September is thanks to losses in the usual names – the big banks and resources names that make up such a large part of the index.
But the fact that the biggest blue chips are all down together points to possible selling by offshore investors, who tend to buy and sell the most liquid names when trading Australia’s sharemarket.
Thanks to our trade ties and reliance on commodity exports, Aussie assets are seen as a liquid proxy for China and emerging markets more broadly.
And money managers in the northern hemisphere would have returned from their summer holidays to find some unwelcome developments in that sphere.
The most notable was in the final days of August when the Argentinian leader took to Youtube to say the International Monetary Fund was going to fast-track its bailout instalments. This spooked markets big-time – were things worse than they appeared, investors wondered. It also became quickly obvious that the IMF had made no such commitment. The Argentinian peso crashed 20 per cent, sending shock waves through already jittery emerging markets assets.
The plunge in the peso times in perfectly with the start of the ASX sell-off.
If that wasn’t bad enough, economic data earlier this week showed South Africa entering into recession for the first time since 2009. The rand tumbled, and hit EM assets again.
So it was that the bear stalking the world’s financial markets in 2018 claimed its latest victim. On Thursday night the broad MSCI emerging markets shares index had slumped to a 20 per cent loss from its peak in January.
Unlike previous EM sell-offs, the ASX has got caught up in the downdraft. A few months ago Australia looked like a safe haven amid the turmoil. Now, not so much.
If global investors have decided to view Australia as a proxy for emerging markets, as has been typical in the past, then that is a worrying development as the stresses in EM are showing no signs of easing.
But if all we are suffering is a bit of a post-reporting season blow-off, led by the best performing stocks of recent months, that is less of a worry.
So has the mounting turmoil in Argentina, Turkey and South Africa changed the minds of global investors around how exposed Australian assets are to emerging market problems? Or is it just a post-reporting season blow-off, led by those that have run the hardest?
Time will tell. But it’s worrying that so deep into 2018, a handful of down days can call into question the year’s gains. It speaks of a fragility to the sharemarket, one that is echoed around the world’s financial markets.
There is a trio of challenges facing global investors: the steady withdrawal of US stimulus and the climbing greenback; the threat of Trump triggering a trade war; and a general loss of economic momentum around the world, with Europe and China both softening.
None are showing signs of easing. The chance of the ASX finishing the year higher or lower looks evenly balanced.