The S&P/ASX 200 Index (Index:^AXJO) is pretty much stuck in a holding pattern with investors trying to work out their next move.
Optimism that economies are reopening after the COVID-19 lockdown is offset by fears of a second Great Depression.
The speedy rebound in the market from its bear market low less than two months ago is only adding to concerns that too much good news is priced into ASX shares. This makes for a challenging time for investors.
GFC provides clues to ASX winners
But the GFC market meltdown more than 10-years ago could hold clues on the parts of the market that are set to outperform, according to UBS.
No two crises are alike, but as Mark Twain said “history doesn’t repeat itself, but it often rhymes”.
“During the GFC, the market’s price level troughed when the speed of the EPS [earnings per share] downgrades overtook that of the price fall,” said UBS.
“Currently, prices have rebounded as EPS downgrades have accelerated, suggesting the market is looking through the downside and may have launched a longer lasting recovery.”
It’s all about earnings, stoopid
However, the broker noted that the share market recovery was extremely fast and that further EPS downgrades lie ahead!
“Therefore, we think it makes sense to look for sectors where valuations and EPS are further along the process of digesting the crisis,” added UBS.
In other words, sectors that are best placed to outperform are those that have suffered the biggest EPS cuts relative to the downgrades they suffered during the GFC, and where the price-earnings (P/E) have started to expand again.
Sectors tipped to outperform
Using this benchmark, the broker believes that Gaming, Technology, General Industrials and retail stocks have bottomed and are more likely to outpace other sectors over the next month.
This analysis reinforces my bullish take on gaming machine maker Aristocrat Leisure Limited (ASX: ALL), while some brokers think the worst is behind our largest casino operator Crown Resorts Ltd (ASX: CWN).
The gaming sector suffered the worst EPS cuts relative to the GFC. Gaming venues are shuttered to curb the spread of the coronavirus and the sectors earnings were reduced by 32% since the start of this year. This compares to the 14% downgrade during the financial crisis.
Other stocks to watch
While tech darling Afterpay Ltd (ASX: APT) share price surge of nearly 400% dominates the minds of investors, I think there are better value options in this space. Among the ex-tech stars that are still miles from regaining their former glory, I like Audinate Group Ltd (ASX: AD8) and Nearmap Ltd (ASX: NEA).
There are also a number of good surprises in retail recently. Stocks that have performed better than feared include linen and home furnishing company Adairs Ltd (ASX: ADH) and electronics retailer JB Hi-Fi Limited (ASX: JBH).
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The Motley Fool Australia owns shares of and has recommended AUDINATEGL FPO and Nearmap Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Crown Resorts Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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