Reasons for caution as tech stars take back seat

The S&P/ASX 200 index itself closed up 1.1 per cent at 6007.8 points.

Investors are betting the tech-­related pullback is over, although Australian tech stocks remain on the back foot in the face of surprising strength in growth and value plays.

The rush for the exits that defined last week quickly abated after Friday’s strong intraday rebounds in US tech stocks and reports that the sell-off — which saw the Nasdaq down as much as 10 per cent from a record high — was merely a “technical correction” triggered by a squeeze on option trades accumulated by SoftBank.

But while market darling Afterpay fell 1.7 per cent to a three-week closing low of $75.04 on Tuesday, Fortescue Metals and Beach Energy rose 3.5 per cent on upgrades, and a range of stocks exposed to Victoria’s lockdowns — banks, property trusts, travel and gambling stocks — performed strongly.

The S&P/ASX 200 index itself closed up 1.1 per cent at 6007.8 points after European markets rose strongly despite the UK’s threat to walk away from UK-EU trade talks.

Asian markets also bounced back and the Australian dollar remained supported despite reports that the US was considering export restrictions on China’s Semiconductor Manufacturing Inter­national, as well as heightened anti-China rhetoric from President Donald Trump before the US election.

“The risk is that the harsh rhetoric bleeds through to action — even if the US-China phase-one trade deal remains — as the moot­ed action on Chinese Semiconductor suggests, and Trump also entertained the idea of ‘decoupling’,” said NAB’s director of economics and markets, Tapas Strickland.

Other reasons for caution include higher volatility limiting the amount of exposure to shares that risk parity investors can have, insider selldowns in tech stocks, the disconnect between financial markets and economic and financial risks, and excessive risk-taking by retail and some insti­tutional investors this year.

There is also the possibility that the Fed does not add more stimulus next week (given near neutral financial conditions and bubble-like conditions in risk assets), US fiscal ­hiatus and the prospect of a close US election, and the threat to trade from deteriorating Australia-China relations.

Meanwhile, Macquarie Equities analyst Matt Brooks said investors should buy stocks that guided to earnings growth, rotate from COVID-19 “winners” to “losers” and look for suitable growth stocks as “TINA” (there is no alternative) remains a major consideration amid near zero interest rates.

Among the top 100 companies, Brooks says WiseTech, NextDC, Goodman, Amcor, CSL, Brambles and James Hardie are more likely to deliver positive surprises on earnings per share. “Management teams typically do not issue guidance unless they think they can hit, if not beat the number,” Brooks said in his wrap of the ­August reporting season.

“There is often a margin of safety for unforeseen events too, and in the current uncertain environment that margin might be larger.

“As a result, companies with guidance should be more likely to deliver positive EPS surprise.”

While reporting season generally beat expectations, Brooks noted that falls in earnings and dividends per share were on par with the global financial crisis.

“Going into results we expected 2019-20 EPS to fall around 19 per cent,” he said.

“The actual result was slightly weaker, with a fall of around 20 per cent … like the fall in 2008-09.”

Stocks that had been hit ­directly by COVID-19 but are now rated outperform by Macquarie Equities include Crown Resorts, Star Entertainment, Sydney Airport, Qantas, Cochlear and IDP Education.

COVID-19 beneficiaries that rated underperform by Macquarie include ResMed and ­Ansell.

As for the TINA trade, growth companies that score highly and are rated outperform by Macquarie include Charter Hall, ­Worley, Cleanaway, Aurizon, Reliance Worldwide and Fortescue Metals.

Value ideas that screen well according to Macquarie include Qantas, BlueScope Steel, Challenger, Telstra, Oil Search, ­Stockland, Link Administration, NIB Holdings, Transurban, BHP, Lendlease, Sydney Airport, Crown Resorts, Star Entertainment and Ramsay Health Care.

But the upward momentum in HUB24, Newell Brands, Ansell and Newcrest Mining is now “overdone” and Bendigo, CBA, Alumina, InvoCare and Whitehaven Coal may be “value traps”, Brooks said.