The coming annual general meeting (AGM) season is a major danger for the share market and ASX investors should prepare accordingly.
That's the opinion of T Rowe Price Group Inc (NASDAQ: TROW) head of Australian equities Randal Jenneke, who warns there's a "very real prospect of a 5% to 10% market correction" this year.
Jenneke says: "The recent dramatic fall in the iron ore price is a good example of our concerns."
AMP Capital chief economist Dr Shane Oliver agrees, saying local "shares may still have more downside" and that a correction is on the cards before 2021 is done.
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Lockdowns in Australia are killing the mood
While the half-year results season in February was very optimistic, the Delta strain of COVID-19 had since soured sentiment for ASX shares.
"[A] victim of the east coast lockdowns was the upbeat earnings outlook from earlier this year," Jenneke said.
"We saw roughly twice as many downgrades as upgrades for FY22 earnings growth estimates. This was a big shift from half-year results, which was one of the best from an earnings vs. upgrades perspective in decades."
The next big problem for ASX shares
The change in international liquidity is the next major hurdle for Australian stock portfolios, according to Jenneke.
"Tapering is coming and the credit impulse of the world's three largest economies [USA, China, European Union] is already negative," he said.
"Combined with earnings growth sliding into downgrade territory [and] still-elevated PE dispersion, we are likely to see investors become ever more focused on stock fundamentals."
The next round of updates from ASX companies is due over October and November when AGMs will be hosted. It's also the season for stockbroker conferences.
Jenneke warns ASX investors to prepare for disappointment over this period.
"We believe these updates are more likely to disappoint overly rosy market expectations," he said.
"Earnings downgrade cycles come in waves — only the first one has broken!"
How T Rowe Price has its portfolio positioned
Considering these upcoming risks, Jenneke reveals how T Rowe Price has shifted its Australian stock composition to negate the effects.
"We shifted our positioning away from domestic cyclicals and more towards higher quality defensive businesses, reflecting our concerns about slowing growth, rising earnings risks, high valuations, and diminishing government and central bank support for markets," he said.
"This view is rapidly becoming consensus but isn't quite there yet, with some investors remaining stuck in the reflation camp, albeit in smaller numbers."
