Name: Reality bites as ASX drubbing erases this year’s gains
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Reality bites as ASX drubbing erases this year’s gains

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Skip to navigationSkip to contentSkip to footerHelp using this website - Accessibility statementOct 3, 2023 – 11.14am&nbsp;or&nbsp;Subscribe&nbsp;to save articleThe 1.3 per cent drop on the ASX 200 on Tuesday after another torrid night for bonds could be a sign that bad news on global markets is finally catching up with Australian equities.The yield on US 10-year Treasuries hit 4.7 per cent on Monday night on Wall Street, the highest since 2007, while the yield on 30-year US Treasuries topped 4.81 per cent, the highest level since 2010, and 5-year Treasuries similarly rose about 10 basis points.The higher-for-longer narrative that has engulfed markets in the last four weeks – the 10-year yield was 4.1 per cent at the start of September – got a little extra support from a stronger-than-expected US manufacturing report and more squabbling over the US government shutdown, the threat of which has now been pushed out until mid-November.The only positive on Monday night was that oil prices fell below $US90 a barrel, as traders fretted about what higher yields might do to the global economy. Still, oil is holding on to its gains of about 30 per cent since May, which is an extraordinary move.But while Wall Street’s benchmark S&amp;P 500 index managed a 0.01 per cent gain on Monday night, the S&amp;P/ASX 200 started Tuesday on an ugly note with just 13 stocks in positive territory in early trade.AdvertisementThe local benchmark is now down 6.8 per cent since the start of August, and has now given up its year-to-date gains.Zoom out even further, and ASX investors are looking at three lost years – for all the excitement of the pandemic rally and the subsequent correction, stocks are back to where they were in February 2020, before COVID-19 shuttered the world.If there’s a glass-half-full view of Tuesday’s carnage, it might come from new analysis by Goldman Sachs’ local strategist, Matthew Ross, which suggests the local sharemarket is actually holding up much better than might be expected.Ross notes that the rise in US bond yields has hit US growth stocks hard, and they have fallen about 15 per cent since mid-July. Higher yields increase the rate at which investors discount future profits, and so tend to high-growth stocks hardest; even the so-called Magnificent Seven that led the market higher this year – Apple, Microsoft, Tesla, Meta Platforms, Alphabet, Amazon and Nvidia – are down about 6 per cent since mid-July.But it’s a different story among Australian growth stocks, which are holding up very well. Overall, Ross says this basket, which includes Pro Medicus, Megaport, Carsales, Altium, Life 360, Xero, Nanosonics, WiseTech, Domino’s Pizza, Treasury Wine Estates and Chorus, have fallen just 4 per cent.AdvertisementOnly four local growth stocks fell more than 10 per cent – Polynovo, WiseTech, Resmed and Block – and eight stocks have actually gained 10 per cent, including Pro Medicus, Hub24, Carsales, Cochlear and Domino’s.The gap between US and Australian growth stocks is now wider than it’s been going back to the start of this current cycle, which Ross puts at September 21. But he says local growth stocks, which are trading on 35 times earnings, are now arguably between 30 per cent and 40 per cent overvalued given where bond yields have moved to.Local stocks have also delivered a relatively muted reaction to the sharp move higher in oil prices. While comparisons with previous cycles are a little dangerous given this oil spike has occurred so quickly, Ross says the S&amp;P/ASX200 generally climbs 11 per cent when the oil price rises more than 30 per cent, thanks to the strong representation of energy stocks. But this time, the market is up just 1 per cent.Similarly, consumer discretionary stocks typically fall 8 per cent when oil prices climb more than 30 per cent. But they have actually risen 4 per cent since May.The drubbing the ASX took on Tuesday morning raises questions about whether local investors are finally waking to the idea that sharply higher bond yields and sharply higher oil prices have to hurt stocks – although the selling is so widespread, it’s hard to pick any key themes.What is clear is that a dangerous period looms for equity markets in the run-up to the year’s end. As we learnt during the global financial crisis, higher bond yields eventually break things; sentiment, and the soft-landing story that local investors have been telling themselves may be early casualties.&nbsp;or&nbsp;Subscribe&nbsp;to save articleFollow the topics, people and companies that matter to you.Find out moreAdvertisementFetching latest articles

Skip to navigationSkip to contentSkip to footerHelp using this website - Accessibility statementOct 3, 2023 – 11.14am&nbsp;or&nbsp;Subscribe&nbsp;to save articleThe 1.3 per cent drop on the ASX 200 on Tuesday after another torrid night for bonds could be a sign that bad news on global markets is finally catching up with Australian equities.The yield on US 10-year Treasuries hit 4.7 per cent on Monday night on Wall Street, the highest since 2007, while the yield on 30-year US Treasuries topped 4.81 per cent, the highest level since 2010, and 5-year Treasuries similarly rose about 10 basis...

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James Thomson

For 70 years, The Australian Financial Review has been the authority on business, finance and political news in Australia.

Reality bites as ASX drubbing erases this year’s gains

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