Do you get the sense the markets are regaining their euphoria?
The S&P/ASX 200 is up 7.4% so far in January alone, hitting a nine-month high.
Since 3 October 2022, the ASX 200 has been up 15%.
If we were to be a bit cheeky, we could say the ASX is running on annualised gains of about 88%.
Clearly absurd, but it does highlight the recent price action.
The animal spirits aren’t just animating the ASX.
Last week, European shares also hit a nine-month high, a pattern across global markets.
US equities — often bolstered by their pacy tech stocks — are underperforming the rest of the world.
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| Source: Financial Times |
In fact, it’s Chinese tech stocks leading the way. They have staged a remarkable US$700 billion rally upon China’s reopening.
Hong Kong’s Hang Seng TECH Index is up 60% from last October’s lows.
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| Source: Financial Times |
The weakening of the US dollar, the easing of inflationary pressures, and China’s loosening of COVID-19 restrictions are helping markets stage a recovery.
But when does a recovery turn into a bull run? Are animal spirits truly back?
How have 2022’s worst-performing ASX stocks started in 2023?
Let’s look at ASX stocks in particular. Recently, I’ve haphazardly noticed some big jumps in stocks heavily beaten down last year.
I wanted to know how wide the phenomenon was, so I turned to last year’s 10 worst-performing ASX stocks of 2022.
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How are these stocks faring since?
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Eight of the 10 have started the year in the black, with battery stock Novonix [ASX:NVX], software firm FINEOS [ASX:FCL], and BNPL fintech Zip Co [ASX:ZIP] as the standouts.
What’s happening with ASX BNPL stocks?
BNPL stocks, in particular, have rallied strongly in recent weeks.
- Zip is up 49% this month
- Splitit [ASX:SPT] is up 32% this month, and 85% since 31 October 2022
- Sezzle [ASX:SZL] is up a massive 80% this month
- Openpay Group [ASX:OPY] is up 20% this month
- Laybuy Group Holdings [ASX:LBY] is up 20%
But don’t be fooled. The sector still has big issues. That was highlighted by BNPL minnow Laybuy announcing yesterday it wants to delist from the ASX.
Speaking to the Australian Financial Review, TMS Capital portfolio manager Ben Clark said BNPL firms are battling for survival, no matter how well the stocks have started the year:
‘I think it’s going to be very tough for them going forward. The regulators are starting to squeeze the pins on them. I just think all those little ones don’t have the balance sheet capability and their warehousing [funding] costs are going through the roof.
‘I think they’re all battling for survival now. The biggest issue this year is going to be the delinquency rates, we’ve seen they’ve been ticking higher. So, that’s rightly an area the market is worried about.’
What about WAAX stocks?
When the market stages a comeback, usually, it’s the growth-focused tech stocks that rise the highest.
Cathie Wood’s ARK Innovation ETF (an exchange fund betting big on growing tech companies), for instance, is up nearly 20% so far this year.
So how are Australia’s tech stocks doing, especially the WAAX stocks?
WAAX is Australia’s answer to FAANG (Facebook, Apple, Amazon, Netflix, and Google) and consists of WiseTech Global [ASX:WTC], Altium [ASX:ALU], Appen [ASX:APX], and Xero [ASX:XRO].
Afterpay was part of WAAX before its takeover by Block Inc [ASX:SQ2].
So, here’s how the WAAX stocks are performing in 2023:
- WiseTech is up 13%
- Altium is up 10%
- Appen is up 6%
- Xero is up 5%
- Block, owner of Afterpay, is up 17%
Solid, but not as exuberant as you’d think. That’s likely because the WAAX stocks are mature tech stocks burdened with size and expectations.
When you zoom out, the Aussie tech sector as a whole is up nearly 10% this month.
Consumer discretionary up big time
But some of the biggest surprises for me came in the consumer discretionary sector.
Take Cettire [ASX:CTT] — an online luxury goods retailer. Cettire is up nearly 40% in January and 280% in the last six months.
Jewellery retailer Lovisa [ASX:LOV] is up 12% so far this month and up 50% since July 2022.
Troubled women’s apparel retailer City Chic Collective [ASX:CCX] — laden with inventory — is up 55% this month alone, spiking after retail mogul Brett Blundy accumulated a 7.3% stake in recent months.
And online retailer Kogan [ASX:KGN] — heavily sold off in 2022 — is up 20% this month and 50% since October 2022.
Of course, there is the more mature business of Super Retail Group [ASX:SUL], up 18% this month, boosted by a strong trading update last week.
This bump in retail stocks isn’t exclusive to the ASX.
European markets have been led by a rally in consumer discretionary.
As the Financial Times reported today:
‘But the best-performing sector is consumer discretionary, where valuations (outside of car companies) tend to be higher. And looking at the companies that have seen the biggest increases in market cap (in euro rather than percentage terms) the top names are expensive stocks like LVMH, Novo Nordisk, ASML, Hermes and L’Oréal. The European rally looks more like a response to an improving economic outlook than a rush after value.’
So, is all this a rational recovery from 2022’s doldrums…or the return of irrational exuberance?
In the US — so often the bellwether for markets elsewhere — traders are forecasting inflation to fall as fast as it has done only three times before in the last 75 years.
Markets are betting the economic outlook will clear up and clear up quickly.
As the Wall Street Journal put it yesterday, ‘behind this year’s improved start for markets lies a broad wager that inflation will soon post a once-in-a-generation decline.’
But what happens when inflation doesn’t decline quickly?
Are markets too blasé about this risk?
High hopes breed big disappointments.
Until then,
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Kiryll Prakapenka,
For Money Morning
