The S&P/ASX 200 Index (ASX: XJO) fell sharply today, down 2.0% in late afternoon trading.
The ASX and Asian share markets are following the lead of the United States and European markets, where all the major indexes lost ground yesterday (overnight Aussie time).
In the US, the S&P 500 Index (INDEXSP: .INX) fell 2.6%. Technology shares weren't spared either, with the tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) also dropping 2.6%.
In Europe, Germany's DAX PERFORMANCE-INDEX (DB: DAX) led the charge lower, closing down 1.8%.
Today's retrace among leading Australian shares puts the ASX 200 back in the red for the calendar year, down 0.8% since the opening bell on 4 January.
With all the talk of frothy markets and bubbles circulating in the financial news, you'd be forgiven for feeling a touch of anxiety.
But according to a wide range of market veterans, the mid-term outlook for share prices remains quite positive.
A tradeable low
Addressing the overnight selloff in equities, Fundstrat Global's Tom Lee wrote in a note (quoted by the Australian Financial Review [AFR]):
Equities are selling off sharply today and [it] is broad-based… I think there is a good chance today is a tradeable low. Yes. Not the start of a correction, but the resolution of this trading range.
As the AFR reports, David Older, head of equities at Carmignac sounds a more cautious note, though he's not expecting any kind of major market falls:
Timing the end of this frothiness is hard. It can go on longer than you think. I don't see a huge move lower… But we have become more cautious.
One of the big changes we saw in 2020 was the rapid rise of retail investors. Many mum and dad investors signed up to new low cost (or even free) online trading platforms during the coronavirus pandemic lockdowns. These so-called Robinhood investors are often quick to chase the latest hot tips. And some analysts believe they could be a destabilising market force.
But Salman Baig, multi-asset investment manager at Unigestion in Geneva, isn't losing sleep over the increased presence of retail investors. He points to the fact that most previous bubbles, like China's 2015 market meltdown, saw retail investors heavily dependent on margin finance (aka debt). But today's environment is different:
It's important to remember how retail investors are financing these purchases… Now, household savings are high. People have built up cash balances… It does not feel to us like a bubble. Rather, there are some expensive stocks where there could be a meaningful correction.
Andrew Sheets, chief cross-asset strategist at Morgan Stanley, adds, "The fact that people are still nervous enough about future volatility suggests people are not all in."
Michael Kelly, head of multi-asset investment at PineBridge Investments also isn't ready to jump on the bubble bandwagon:
I don't think the bubble bugles are acknowledging why stocks are so expensive. In 2021, markets are going up because earnings are going up and excess liquidity is still surging. We are in a structural growth in capital because of the rising savings rate and, on top of that, quantitative easing. We've never ever had that before.
Speaking of ASX earnings…
In case you're just tuning in from your summer holidays, earnings reporting season kicks off next week. And though few would have expected this at the height of Australia's pandemic lockdowns last autumn, company earnings are expected to come in quite strong.
As reported by the AFR, Citi forecasts market earnings per share growth of 20% in 2020-21. Citi expects the resources sector to outperform, with earnings growth of 32%. As for dividends, Citi forecasts 22.3% market-wide growth.
According to Citi Australia's head of research, Craig Woolford:
It's likely reporting season next month will show many companies have delivered earnings growth over the six months to December, which back in March or April 2020, people would have thought was mad…
The mining companies are benefiting from much higher prices, particularly for iron ore, copper and nickel… We think the strength of the domestic economy will mean there's less credit risk for the banks and potential for some of the provisions to unwind that they made over 2020.
Quoted in the same article, T. Rowe Price's head of Australian equities, Randal Jenneke says:
To the extent that we get a higher number, that is going to support markets. We know that we have had an enormous amount of monetary and fiscal support that has really been helping demand for the better part of nine months…
I think that where the market has got this wrong is that this earnings strength is not just going to peter out in the next two to three months. It's going to be ongoing for most of this year.
The other part of the market that I think is going to do well is the global cyclicals, the miners in particular, as we are going to have a global cyclical recovery… Provided we have a good solid recovery in earnings, it's not unusual for multiples to be elevated right now given there's an expectation earnings will improve.
Jenneke indicated 5 ASX 200 shares investors should keep an eye on during the upcoming earnings season.
Domain Holdings Australia Ltd (ASX: DHG), whose share price is up 1.1% in 2021 and up 22.0% since this time last year.
SEEK Limited (ASX: SEK), whose share price is down 4.2% in 2021, but up 17.1% over the past year.
Harvey Norman Holdings Limited (ASX: HVN), whose share price is up 11.2% in 2021 and up 23.9% over the last full year.
James Hardie Industries plc (ASX: JHX), whose share price is down 5.0% in 2021, but up 15.2% since 29 January 2020.
And OZ Minerals Limited (ASX: OZL), whose share price is down 4.4% this calendar year, but shares are up an impressive 83.9% over the last full year.
