Tax-loss selling could be pile-driving fundamentally good companies into the ground. At least, that's what analysts at Macquarie think, prompting the team to name a handful of ASX shares to buy following the indiscriminate tax-driven selling.
The S&P/ASX 200 Index (ASX: XJO) is getting scorched during its second-last trading day of the financial year. At the time of writing, Australia's benchmark index is 1.3% lower than yesterday despite a positive showing on Wall Street last night.
Part of the selling pressure could be from last-minute tax-loss selling, a strategy whereby investors crystallise losses to offset other capital gains. This can result in pockets of the share market temporarily disconnecting from reasonable share prices.
Macquarie believes there are six prime contenders ready for a rebound.
6 ASX shares to buy for a post-tax recovery
Recent data points hint at difficult operating conditions for corporations as the Reserve Bank of Australia's 4.35% interest rate begins to bite into the economy. Macquarie is mindful of this as we approach the August earnings season, with Matt Brooks of Macquarie Group stating:
With orders remaining weak, labour cost growth still too high and rising transport costs, we still expect to see more negative earnings surprises in the lead up to the August reporting season.
Brooks' answer to this economic risk is finding and buying the underdogs.
The head of Australian equity strategy named six ASX shares in the buy zone in July to capitalise on investors potentially throwing the baby out with the bathwater amid tax-loss selling. The companies are listed below:
| ASX-listed company | 1-year return | Month-to-date return |
| BlueScope Steel Limited (ASX: BSL) | -2.4% | -5.5% |
| Worley Ltd (ASX: WOR) | -6.7% | -0.1% |
| Karoon Energy Ltd (ASX: KAR) | -5.6% | -1.9% |
| Pilbara Minerals Ltd (ASX: PLS) | -33.4% | -17.3% |
| IDP Education Ltd (ASX: IEL) | -29.8% | -6.9% |
| Star Entertainment Group Ltd (ASX: SGR) | -48.7% | 4.9% |
Aussie lithium producer Pilbara Minerals has been the hardest hit of the above bunch this month, down 17.3%. The company's shares have been under immense pressure as the price of the electrifying chemical has waned.
While Macquarie might have it down as an ASX share to buy, the outlook remains foggy. This week, analysts at Citi have put out an eery forecast of a further 20% fall for lithium, justified by rapidly rising inventories.
Switching gears. Shares in Star Entertainment are now up in June after the troubled casino company announced the appointment of Steve McCann as CEO. McCann has previously helmed Lendlease and Crown Resorts.
Where Macquarie is wary
If Brooks is backing the underperformers, one would assume the analyst is not keen to buy ASX shares that have increased in value recently. It turns out that's exactly the case.
Financials have been the second-best-performing sector over the past year, trailing only tech. The strength has seen the big four banks rally by more than 20%. However, as Brooks points out, the amped-up valuations result from an increase in the price-to-earnings (P/E) ratio — also known as 'multiple expansion'.
As such, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), and ANZ Group Holdings Ltd (ASX: ANZ) are all on Macquarie's 'underperform' list.
According to Macquarie, Wesfarmers Ltd (ASX: WES) is another ASX share falling short of a buy rating. Like the big banks, the retail conglomerate has benefitted from multiple expansion, lacking earnings growth to support its beefed-up valuation.
