Sharemarket bounce for real but beware bears

The ASX 200 is reviving in recent weeks, yet economic news has only got worse.

Bumper results in the earnings season will be largely driven by resource stocks. Picture: NCA NewsWire Dylan Coker

Is the sharemarket recovering? Traders have pushed the ASX higher in recent weeks, even with the arrival of a technical recession in the US and further interest rate increases in our own market.

In effect, our sharemarket has only been peeling back its losses. Still, if we take a snapshot of the ASX 200 just now, what we have year to date is a drop of around 6 per cent. That modest reversal does even meet the definition of a market “correction” (a fall of 10 per cent plus).

Investors might well be puzzled: Where is the good news that underpins this improvement in mid-year momentum?

The simplest explanation may well be not so much that things have improved. Rather they are not as bad as many expected.

Markets have been plagued by fear rather than greed since early 2022 but the outstanding “bear” factors have been higher rates and higher inflation.

So what’s changed: The key factors which are changing sentiment were captured neatly by the RBA governor Philip Lowe in his statements accompanying this week’s rate rise.

Lowe laid out the three reasons the bank believes inflation may soon peak;

1) The ongoing resolution of supply side problems — in other words, the bottlenecks in world trade that have pumped up prices will sort themselves out in the months ahead.

2) Commodity prices are expected to stabilise. This is not a boon for the Australian market with its heavy weighting towards resource stocks. But it will lift sentiment in global sharemarkets.

3) The impact of rising rates. In common with Lowe’s belief that rate lifts will eventually moderate inflation, markets may begin to worry less as traders assume the bulk of rate increases may now have been achieved for the current cycle.

Keep in mind that our market offers a 5 per cent dividend yield – on that basis a small improvement between now and December would see us edge close to positive total returns for calendar 2022.

Most analysts are understandably wary of extrapolating too much from the recent uptick in share prices. But many also hold the view that returns so far this year have been so bad across so many asset classes that it can only get better.

Certainly, the reporting season is delivering powerful profits as promised: in the US 75 per cent of companies have beaten market forecasts. On the ASX the consensus is for a 20 per cent lift in earnings per share.

In our market those bumper results will be largely driven by resource stocks. Top commodities such as iron ore were still getting historically high prices only a few months ago.

But this is not the sector that is expected to buoy the market during the rest of 2022.

While traders will be on red alert for any company outlook statements that suggest conditions are set to deteriorate, they will also be looking to stocks that might surprise “on the upside”.

ASX stocks with strong international earnings are the favourites here — they make up about one third of the ASX 200 capitalisation.

Amcor, Coles, CSL, Next DC, Reliance, Seek and TPG Telecom, all make regular appearances in broker reports as stocks that may do well thanks to the strong US dollar. CSL is a swing factor — it is also one of the few blue chips already showing a (very slim) positive return this year.

Within the resources industry, gold miners are the only segment where there is the potential of widespread improvement, though this is largely due a view this segment has been “oversold”.

In short, the sharemarket is recovering – from the pit of despair three months ago. But it remains much too early to declare the bears have been put back in their cave.