‘Mixed’ February reporting season sees market | Australian Markets

The “mixed but generally positive results” from the February reporting season has seen new alternatives come up for energetic traders and managers, says the native arm of specialist energetic equity supervisor, Martin Currie.

According to Reece Birtles, Chief Investment Officer at Martin Currie Australia, the current reporting season had signalled a shift in market sentiment that has cemented the rise of passive investing, along with “bubble-like conditions waning” and “value and income dominating”.

Birtles discovered that index, passive or exchange traded fund (ETF)-related flows now account for 25 per cent of each day stock turnover, up by more than 10 per cent from a decade in the past.

“We have conducted analysis on the percentage of daily stock turnover attributable to index buying, which includes passive investing and superannuation fund mandates linked to the Your Future Your Super (YFYS) performance test,” Birtles mentioned.

“Typically, when new details about a stock emerges, corresponding to an earnings shock or a macroeconomic shift, elevated trading quantity ought to cut back the affect of index shopping for on price actions. However, due to the rising weight of index flows, we’re witnessing what we call ‘gap pricing’.

“For energetic managers, these inefficiencies current alternatives. This phenomenon has resulted in inflated costs for the ASX 50’s prime stocks, as passive flows push valuations greater whereas trading volumes decline. When even minor damaging news emerges, it could set off exaggerated price reactions.

“This trend was evident in February, when stocks such as National Australia Bank, Goodman Group, CSL, and Westpac Banking Corporation saw nearly 10% declines within two days, despite only minor earnings downgrades.”

Birtles mentioned corporations took a totally different route on this reporting season when it got here to discussing efficiency; as a substitute of the negatively-affecting ‘external headwinds’, management groups conveyed their confidence and powerful perception in ‘growth and investment’.

“Consumer sentiment remains weak, with evidence of continued bargain hunting and trading down from premium to value brands. However, companies appear to be adapting rather than lamenting macroeconomic pressures,” Birtles mentioned.

“Interestingly, topics corresponding to labour and power prices, provide chain disruptions, and currency volatility – beforehand dominant themes – obtained much less emphasis. Labour market pressures, particularly, have eased as massive authorities infrastructure tasks wind down, decreasing competitors for expert employees.

“China stays a wildcard. The nation’s metal sector faces overcapacity points which will necessitate manufacturing cuts, doubtlessly affecting Australian mining corporations. While demand for electric vehicle (EV) commodities like lithium and uncommon earths stays strong, it’s unsure whether or not this can translate into a significant uplift for Australian producers.

“However, Martin Currie sees no clear path for corporate earnings in Australia at this stage. Factors such as interest rate policy, Chinese economic stimulus, and US tariff wars all contribute to uncertainty.”

Birtles indicated that worth traders could benefit from “fertile ground”, particularly in more “defensive, high-quality opportunities”. However, energetic traders and managers could possibly be set for a comeback by capitalising on “mispricings in the market” as fundamentals return to the foreground.

“This current extreme valuation spread is more reminiscent of the Tech Bubble rather than the crisis conditions seen during the GFC or COVID-19 downturns,” Birtles mentioned.

“To us, the factors driving market returns and the sentiment change during February’s reporting season is a sign that prices are reconnecting with earnings and fundamentals and that wide valuation spreads will soon begin to narrow, and history has shown us that as they do, it can mark the beginning of extraordinary outperformance for value investors for the next 12-18 months.”