Australian shares set to continue worst losing streak since GFC

Australian stocks are threatening to stumble to their longest losing streak since the global financial crisis as anxious investors fret about the growing trade dispute between the US and China and the rout in emerging markets, and baulk at the hefty valuations of high-flying market darlings.

The benchmark S&P/ASX200 Index has tumbled 3.3 per cent as the market has recorded seven straight days of losses as US President Donald Trump ramped up his rhetoric – and threats – against imports from China, with traders and investors concerned the world’s two largest economies are on a collision course for a major escalation in a trade dispute that has been simmering for months.

The market could also be weighed down by a number of large companies including retailer Woolworths, blood products group CSL and miner South32 set to trade ex-dividend this week. CSL will be a focus given its 6 per cent weighting in the S&P/ASX200.

The Australian dollar, viewed as a proxy for global risk appetite, has been caught up in the maelstrom, dropping to US71¢ on Friday from above US80¢ in January amid concerns that growth in China – Australia’s largest trading partner – will be hurt by President’s Trump’s hardball approach to trade, even though growth in the domestic economy is strong. The Australian economy grew at a 3.4 per cent annualised pace in the second quarter.

If stocks notch up an eighth decline on Monday it will be the longest losing streak since January 2008, with investors arguing the local market may struggle to find its footing and could decline further until the outlook for the global economy is more certain.

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“It’s looking like we’re going to be eight days [in the red],” said Martin Hickson, lead portfolio manager at Wilson Asset Management.

“If Trump was to proceed within the next 24 to 48 hours its highly probable to see nine days [in the red].

“Trade tariffs are front of mind for investors. The market appears to have starts pricing in the fact that he will push ahead and thats why we’ve seen weakness. Markets will remain volatile until we get certainty.”

The uncertainty in the global economy has sharpened focus on the rich valuations of stocks that have fuelled a 7 per cent rally off April’s lows.

Market leader CSL had rallied 63 per cent for the year before a heavy fall last week wiped 10 per cent off its value. Popular retail stocks like Afterpay Touch have also reversed their recent heady gains.

Justin Braitling, the founder and chief investment officer of Watermark Funds Management, said for the first time in several years, investors were now questioning the overall valuations which some blue-chip growth stocks had reached.

“For the first time, investors have blinked,” Mr Braitling said. “The Australian market has become very expensive and is vulnerable to a sell-off.”

He said sharemarket darlings like CSL and Aristocrat Leisure had been among the stocks leading the sell-off last week.

“For the last five years it’s been all about growth and momentum and investors haven’t been questioning valuations. But they are now.”

Mr Hickson said that Australia’s high-growth stocks would remain under pressure, with many trading on high price-earnings multiples after being propelled higher on momentum.

“Looking at historical metrics, a lot of the high PE names are still trading on elevated momentums. The top 25th percentile of companies from a valuation perspective are trading at a PE of 30 times versus the historical 20 times. They’ve now surpassed the dot com peak.”

The threat of a major disruption in global trade comes as a selloff in emerging markets, paced by Turkey and Argentina, has rattled global markets, with investors concerned that the rally in the US dollar will cause further distress in developing economies who have borrowed heavily in the US dollar.

Asian markets haven’t proved immune to concerns, with Australia’s northern neighbour Indonesia – and largest economy in south-east Asia – in the spotlight given its current account deficit, while India’s currency, the rupee, has been pummelled. The MSCI Emerging Markets Index is down 20 per cent this year.

With the multiple macro headwinds buffeting Australian stocks and sector specific problems – with banks and insurers in the firing line of the royal commission and the government on the warpath against energy stocks – money managers are uncertain what sector could drive a new rally.

“Given the uncertainties around the with with emerging markets and trade war it could be another choppy week. It’s a bit unpredictable,” said Anton Tagliaferro, investment director at Investors Mutual.

“It’s difficult to see where leadership will come from in the market,” he said. “When you look across the sectors, the banks are dealing with the overhang of the royal commission, in the resource sector we’re seeing sogginess, and in other sectors some of the growth stocks are having a much-needed pause.”

Some market mavens are more sanguine about the recent jitters, saying concerns about a trade war are overblown.
Some market mavens are more sanguine about the recent jitters, saying concerns about a trade war are overblown.

Michele Mossop

However, some market mavens are more sanguine about the recent jitters, saying concerns about a trade war are overblown.

“I’d say its noise,” said Geoff Wood, head of macro and risk at Morphic Asset Management.

“It can have impacts on day-to-day price action but its hard to point to in equities. My view is more that the tariff thing is somewhat overblown in terms of what impact it will have on the economy.

“I think the market will focus on it this week but the major story is the global credit tightening. The weakness in Chinese equities and the Fed tightening in the background are probably things to bring to the front of mind.”

The Australian dollar has been under pressure all of 2018 as traders have zeroed in on the widening interest rate differential between Australia and the US as the Federal Reserve has telegraphed its intent to raise rates. HSBC chief economist reckons the ‘Aussie’ could fall to US68¢ by the middle of next year.

“It’s reflecting the emerging market sell-off so that’s having some effect. The other big story is US dollar strength,” said HSBC chief economist Paul Bloxham.

The US Dollar Index is up 7 per cent this year.

“Its been strong, and on Friday night we got another set of good payroll numbers. The Fed will also be delivering more hikes, one this month and then one in December.”

Mr Bloxham said that market watchers will be paying particularly attention to China’s reaction in the coming weeks adding that should Beijing focus its attention on domestic growth, it would be a positive for the Australian dollar.

“A lot of our prospect hangs on what response we see from China,” he said. “Australia’s exports largely feed into China’s domestic demand. Most of what we produce isn’t a big import into the traded part of China’s economy.”

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