ASX shares have seen underperformance compared to other share markets around the globe. So it's worth considering whether this is a good time to invest in cheap Aussie stocks.
It hasn't been a great year for many of the ASX's biggest blue chips.
The largest ASX miners have seen difficulties – the BHP Group Ltd (ASX: BHP) share price has dropped 2.7% in 2023 to date, while the Fortescue Metals Group Ltd (ASX: FMG) share price is only up 0.6%.
Some of the largest ASX banks are down as well. The Westpac Banking Corp (ASX: WBC) share price is down 10.7% in 2023 so far, while the National Australia Bank Ltd (ASX: NAB) share price is 12.75% lower.
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How have other share markets performed?
The benchmark S&P/ASX 200 Index (ASX: XJO) is only up 2.8% in 2023 to date. Conversely, it has been a strong year for the US share market with the iShares S&P 500 ETF (ASX: IVV) up by 14%.
The UK share market has also done much better. The Betashares FTSE 100 ETF (ASX: F100) is up 9.5% in 2023 so far. Over the same period, the Vanguard FTSE Asia Ex-Japan Shares Index ETF (ASX: VAE) is up 5%, the Vanguard FTSE Europe Shares ETF (ASX: VEQ) is up 12%, and the Betashares Japan ETF-Currency Hedged (ASX: HJPN) is up 30%.
Part of the explanation may be that the ASX 200 simply fell less during 2022 and these markets are recovering more strongly. But it raises the question of whether ASX stocks are actually cheap.
The financial outfit Goldman Sachs has suggested the underperformance isn't justified because the Australian government policy is "pro-growth", which will support higher wages and spending, according to reporting by the Australian Financial Review.
Head of Australian equity research at Goldman Sachs Matthew Ross (quoted by the AFR) said:
We find this soft relative performance somewhat surprising. On top of a macro backdrop that we view as being more supportive than many other developed economies, the bottom-up picture remains robust.
My view on cheap ASX shares
I'd put the underperformance down to global share markets recovering from last year, and weakness for the ASX 200's two biggest areas – iron ore mining and banking.
The mining decline makes sense because the iron ore price has dropped, while the banking drop has occurred amid strong competition for mortgages and deposits.
I wouldn't say those names are cheap, although they're probably at a fair price now because of the current circumstances.
There are also other areas I think could be cheap on a long-term outlook.
On the resources side of things, I think copper is going to see higher demand in the future due to decarbonisation, so there are ASX copper shares I'd look at.
Retail, particularly discretionary, strikes me as cyclical, so I think that sector is a good hunting ground to find shares that have dropped, such as Wesfarmers Ltd (ASX: WES) and Adairs Ltd (ASX: ADH). These shares could recover on a three-year horizon once this period passes.
I also believe some fund managers are being undervalued and could bounce back if asset prices start rising, such as GQG Partners Inc (ASX: GQG), Pinnacle Investment Management Group Ltd (ASX: PNI), Pacific Current Group Ltd (ASX: PAC), and Australian Ethical Investment Ltd (ASX: AEF).
Finally, there are some unloved smaller businesses that I think are demonstrating strong revenue growth, such as Volpara Health Technologies Ltd (ASX: VHT), Siteminder Ltd (ASX: SDR), and Frontier Digital Ventures Ltd (ASX: FDV).
