Here comes the sharemarket reset

Investor Thomas Murphy pictured at the ASX in Sydney. Picture: Dylan Coker

Opening the week with the worst session in months on Monday, traders are furiously signalling a red flag in the local share market. There has to be a reset now to allow for higher rates and stronger inflation.

Two outstanding developments are the drivers of the reset.

First, the expected increase in global interest rates is now due sooner rather than later. It could be late 2022 rather than 2023. Moreover, the calendar changes for potential rate moves continually accelerate. In other words as the global rebound takes hold, there is absolutely nothing to stop rate increases coming even sooner than consensus expectations.

Second, the prospects for inflation are now at their highest for three decades. The key reading for markets – the US monthly annualised figures – has now moved up from 4 per cent to 5 per cent. As this number has risen the ranks of those calling current inflation “transitory” is shrinking by the day.

A one-session market sell-off of 1.8 per cent – even if it is linked with a similar bout of nerves in the US and Asia – can only tell us so much.

In fact two of the big sector drops yesterday came from banks and miners (CBA down 5 per cent, BHP and Rio down 3 per cent each) which does not easily fit the narrative the investors are now looking for value where previously they were looking for growth at all costs.

The story so far this year has been one of investors moving out of growth stocks. At the top of the sell-off have been tech-related companies – led by the so-called WAAAX brigade (when did you last here that term mentioned by a stockbroker?) which have now been aggressively repriced to allow for higher rates.

Made up of Wisetech, Afterpay, Appen, Altium and Xero, WAAAX, if you recall, was our local version of the US market’s FAANGs, which includes Facebook, Apple, Amazon, Netflix and Google.

The wider ASX has managed a healthy lift of around 8 per cent year to date, but the WAAAX set has waned by around 9 per cent.

At the most speculative end of the growth trade are shares which received our local version of a meme-frenzy. Online reseller Kogan would be a perfect example. It is down more than 40 per cent over the year to date.

It would be easy to say the reset in the market in coming months will be characterised by more of the same: an exit from “growth” and return to “value”. But that is not clear at all.

Afterpay should have fallen in the latest sell off but it moved up by 2 per cent. Even Kogan was marginally higher by the end of Monday’s session,

What is going on? Are investors perhaps reviving the lost art of stock picking?

It would at least explain things. Afterpay and Kogan could be regarded as two stocks that have been sold down too far.

Similarly, CBA could be seen as a stock that has been pushed up too high. After all, that is what veteran bank analyst Brian Johnson implied in his latest note, which moved the stock from “buy” to “hold”. When the best known bank analyst in the country downgrades the biggest stock on the boards, don’t be surprised if the bulk of the CBA drop came from that call, rather than concerns about the sale price for the general insurance division.

In reality, over the months ahead, even with rising rates and inflation, yield is not going to come bouncing back. It will be a gradual process. The vast majority of investors are now in the business of total return rather than income hunting. A by-product of the quest for total returns might well be no big narrative of value chasing or growth aversion rather investors may just start getting selective.