As the ASX, alongside other global markets, continues to slump in September, questions continue to be raised over whether the market is on the verge of a drastic drop.
The Australian market’s September performance continues to disappoint, as of Tuesday the exchange was down by 3.81 per cent.
The performance has largely been driven by its reliance on earnings within the materials space as iron ore prices continue to sink to record lows.
NAB director, economics, Tapas Strickland highlighted that the futures traded below $100/tonne on Friday for the first time since July last year.
The ASX 200 followed up as it suffered one of its worst days in 2021 on Monday, falling 2.1 per cent to 7,348 at the close, with miners again leading the losses.
There is a case to say that this is only natural, once every 10 months, monthly returns are expected to be below 5 per cent. But according to State Street head of portfolio management – Australia active quantitative equities, Bruce Apted this trend has been absent for 17 months.
Focusing on the Australian market specifically, what was most concerning for Mr Apted was a declining outlook for earnings over the next 12 to 24 months, with very few industries being unaffected.
“Post reporting season we are now seeing downgrades across the S&P/ASX 300 Index as a whole and for most sectors,” he said.
“Telecommunications, staples and financials (mostly insurance) are the only sectors that are bucking this negative trend.”
However, despite the struggles currently experienced in the Australian market, Jun Bei Liu, portfolio manager at Tribeca Investment Partners said that she thinks talk of a correction is overblown.
“I don’t think this is the beginning of a far more severe pullback,” she said.
“It’s a little bit of a profit-taking after what was an incredible reporting season.”
Mr Apted said his view was partly informed by various Delta variant-related issues – including supply bottlenecks and rising inflation. It was also said that increasing regulation across China and the US was adding to economic uncertainty.
Ms Liu, on the other hand, thinks that such disruptions are simply short-term, and that market confidence will quickly return in kind.
“I really think that market will look past it very quickly, simply because some of the macro-data has already bottomed,” Ms Liu said.
“Now that the vaccination rate is picking up around the world – very soon we’ll start to see some improvement in some of this data.”
Is quality the name of the game?
In preparing portfolios for any potential correction, Mr Apted recommends that investors look towards what he sees as a quiet achiever – quality.
“Quality has been the best performing theme in the eight months to 31 August 2021,” he highlighted.
“The MSCI World Quality Index has outperformed the MSCI World Index by 4.0 per cent YTD. Compare this to the MSCI World Growth Index only up 0.9 per cent and MSCI World Value Index down -1.2 per cent.”
While quality investing has proven profitable in 2021 so far, Mr Apted underlined the theme’s ability to generate excess returns in down markets and outperform during periods of rising inflation as the reason why he believed that investors should look towards it as correction continues to threaten.
“Highly ranked quality companies tend to have greater pricing power – having the ability to pass on rising input costs to the end customer and maintain margins. In recent times many companies have been tested with rising input costs,” Mr Apted advised.
“The higher quality companies have been able to pass these costs on to the end customer and have maintained profitably and held high margins.”
Again, Ms Liu was in disagreement with Mr Apted, saying that investment in this space was not that simple. In her opinion, investing in quality on theme alone was fraught with risk as she believed many companies within it had already seen their share price peak throughout the pandemic.
“They are trading at all-time highs, they are so expensive, and their earnings are very much the beneficiary of Covid,” Ms Liu argued.
“Once the world reopens, their earnings are looking to fall.”
Ms Liu believes that while such companies may currently hold their value, their share prices will begin to lag in the next few months – instead she recommends that investors be picky with such investments, putting money into equities that are yet to see earnings recover from the pandemic.
“Their earnings have yet to recover, and in the next 12 months things are certainly going to look better for them,” she said.
Examples she included were Ramsay Health Care, Endeavour and Scentre Group, all impacted throughout the pandemic, and in her opinion, trading at a discount to their true value.
She also advises that investors build portfolios around a clear re-opening theme.
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