Fund managers are bracing for the wildest earnings season yet for the ASX, avoiding retail and housing sectors but doubling down on technology, defence and energy stocks as algorithmic trading wreaks havoc on the market.
The rise of index-tracking funds, high-speed trading and so-called “pod shops” that trade aggressively on daily headlines means even minor earnings misses or beats could trigger wild price moves.
During the February reporting season, Morningstar said, stocks moved an average of 6 per cent on results day, which was the largest swing in a decade.
Jun Bei Liu, co-founder of hedge fund Ten Cap, expectings similar price action this month given higher interest rates from the Reserve Bank of Australia and the spike in energy costs from the Iran war.
“This reporting season probably will have more heightened volatility, given what has been happening on the economic front,” says Liu.
“Corporate earnings are under a lot of pressure, with higher inflation and higher costs in an environment where consumers are also under more pressure.”
To contain runaway inflation, the RBA raised the cash rate three times this year, to 4.35 per cent, the highest level in more than two years. Traders now see a 60 per cent chance of a fourth increase by Christmas.
Liu expected theose pressures to linger over balance sheets as Brent crude oil trades at about $US84 a barrel, up from a low of $US70 a month ago.
“Corporate guidance will be very important and could surprise, because the revenue environment will be even tougher,” she said.
To navigate these problems, Liu has avoided consumer stocks, having recently sold retail conglomerate Wesfarmers.
Instead, she invested in healthcare providers such as ResMed and Ramsay Health Care, alongside specialised artificial intelligence infrastructure suppliers Southern Cross Electrical Engineering and GenusPlus.
Should market overreactions trigger sharp drops in a share price, it would be a prime time to buy, provided the business remained sound, Liu said.
But if a slump looked set to drag on, she planned to wait for signs of a recovery.
Sean Sequeira, chief investment officer at Australian Eagle Asset Management, is taking the same approach.
“This expected high-volatility season means we will probably adjust our entry and exit processes, where we slow things down a little bit if momentum takes stocks further than we expect,” said Sequeira.
“So if we do like the stock for the long term, we’ll slow the buying to take that into account, or we will delay buying. It’ll be somewhat the same on the upside as well.”
The fund recently bought software registry Computershare and hearing firm Cochlear, while taking profits in insurer QBE and supermarket operator Woolworths.
Despite recent pullbacks in defence and artificial intelligence-related shares globally, fund managers remained firm on the long-term trends.
Source: https://www.afr.com/markets/equity-markets/investors-brace-for-wild-earnings-swings-by-hiding-in-tech-and-defence-20260731-p60kfr