“Buying the dip” is no longer an easy way for inexperienced traders to make quick money in the stock market, warned one seasoned stockbroker.
Most important points:
- The best performing ASX sectors last year were utilities (+29 pc) and energy (+27 pc)
- Every other sector fell, including technology (-39 pc) and consumer discretionary (-24 pc)
- Lithium, coal and wheat stocks posted the biggest gains
That’s despite the ASX 200 being in correction territory, plummeting more than 10 percent (or about $250 billion) in the past year.
It’s a catchphrase among traders that basically means you buy a stock for a “bargain” after its price has fallen sharply and with the hope that it will bounce back.
“I think we all need to get rid of the ‘buy the dip’ mentality, because that’s dangerous in a declining market environment,” said Michael McCarthy, chief strategy officer at Tiger Brokers.
It’s a strategy that has worked well for many who started investing in stocks after the March 2020 COVID-19 crash.
That’s because markets often hit new all-time highs, while central banks (such as the Reserve Bank, US Federal Reserve, and others) cut interest rates to zero and collectively flooded the world with trillion-dollar stimulus measures to offset the economic damage done. by the pandemic.
But now markets are falling sharply as the RBA and its global counterparts aggressively raise rates and turn off the money tap in a desperate attempt to lower inflation.
In fiscal year 2021-2022, the heaviest losses were felt by local technology stocks and companies buy now and pay later.
The values of former market darlings Zip Co, Sezzle, Megaport and Tyro Payments have each fallen about 70 to 97 percent during that period.
“It’s when investors buy a stock with an optimistic outlook. But those optimistic outlooks don’t materialize and the stock price falls.
“However, instead of cutting losses and walking away, investors are buying more of the same stock.”
Beware of ‘fashionable’ lithium stocks
Many of the best-performing ASX stocks in the past year have been commodity exporters, driven by a rise in lithium, oil, gas and wheat prices.
The largest beneficiaries were Core Lithium (+319 percent) and Allkem (+69 percent), miners Whitehaven Coal (+164 percent) and New Hope (+112 percent) and grain merchant GrainCorp (+83 percent).
However, Mr. McCarthy believes that many of the top performers from the past fiscal year may underperform in the coming year.
“What’s often the case in markets is that what’s in fashion at one point in time performs worst when fashion changes.
“There is certainly a lot of interest in the lithium space because of its potential use in electric batteries.
“But the fact that copper — which is equally important in battery manufacturing — has not performed as well suggests that there are elements of ‘fashion’ for that lithium stocks outperformance.”
Copper prices fell to a 16-month low last week amid concerns about falling demand, as each successive rate hike by central banks increases the likelihood of an economic downturn.
Russia’s war in Ukraine has led to a spike in coal prices, turning the fate of coal companies.
“Last year it was absolutely terrible with coal, but now they’ve gone from basement to penthouse in a year,” said Hugh Dive, Atlas Funds Management’s chief investment officer.
“Around this time last year, people feared they would be stranded assets, and China has banned Australian thermal coal. It’s a different story now.”
‘Money price goes up’
“Any business that receives consistent revenue through the rate hike cycle could be very attractive,” said Mr. McCarthy.
“It’s one of the reasons we see consumer goods getting good support, for example. Most supermarkets are doing well, even during a recession.
“Medical exposures can be very beneficial in the coming year. Heart surgery is not something you put off because of the economic prospects.
“So I would look for companies that are exposed to those industries … that are likely to continue to function well and provide cash flow, which is one of the keys in an environment where the price of money is rising.”
As for what isn’t likely to perform well in the coming months, Dive says it’s best to avoid unprofitable, heavily indebted companies and “high-growth” companies, which are expensive when you compare their stock price to how much they earn. Many tech startups fit that bill.
“A company that doesn’t have a lot of revenue today — that promises big revenue in the future — if interest rates go up, their profits are discounted.
“And those tech earnings — which may be big gains 10 or 15 years into the future — are worth less now.”
“An environment of rising interest rates favors companies that are actually making money today, rather than hoping to make money in the future.”
In general, he expects industry, chemical companies and insurance stocks to do well as interest rates continue to rise.
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