3 Investment Themes Shaping the ASX and the Lessons for Investors

3 Investment Themes Shaping the ASX and the Lessons for Investors

As we enter the final stretch of 2019, investors have enjoyed a bumper year so far, with the ASX 200 up 20.7% at the time of writing. While there have been setbacks along the way, investing in shares this year has by and large been a smoother experience compared to the volatility of prior years. 

Nonetheless, we’ve also witnessed key investment themes in recent months, which lead the way to some important lessons for investors. Let’s take a look at three of these investment themes.


Momentum investing in stocks is proving dependable 

On the surface, it has been a strong year for all sectors of the ASX, with each of the 11 sectors advancing by double-digit figures. However, while gains are broad-based across all sectors, at an industry level there is a different story playing out. 

Nowhere is this more apparent than the health care sector, which is this year’s strongest performer with shares rising 41.8% year-to-date. Blue-chip favourites like CSL (ASX: CSL), Cochlear (ASX: COH) and ResMed (ASX: RMD) have not only delivered significant returns, but they have each set new all-time highs.

Despite the momentum in this sector, investing in shares within the medicinal cannabis industry has proved to be anything but a smooth ride. Whereas cannabis shares were in favour at the start of last year, momentum investing has weighed heavily on the industry during 2019. Take Cann Group (ASX: CAN) and Auscann (ASX: AC8) for example, which have both fallen 60% year-to-date amid declining sentiment from the equivalent sector in the US.

Elsewhere, returns among bank stocks are up 8%, but this not only underperforms against the rest of the financial sector (up 11.7%), it significantly trails all other sectors. Given the banks’ contribution to the ASX, it shows how much lifting other industries have done this year. This leads us to the WAAAX stocks, which have had a tremendous year. Investing in shares from this group would have yielded an average year-to-date gain of 93.6%, with their momentum proving a market highlight in 2019.

The key takeaway here is that even if a specific stock, sector or industry has already posted strong gains – or sharp falls for that matter – there is every chance that momentum could continue.

The performance of each ASX sector so far this year


The resurgence of ‘short first and ask questions later’

The practice of short selling has regularly sparked controversy, but this year the matter has drawn extra scrutiny amid a series of ‘short reports’ targeting several ASX-listed shares. Rural Funds Group (ASX: RFF) and WiseTech Global (ASX: WTC) are two high-profile examples, while some investors would even include Afterpay (ASX: APT) into the discussion.

Regardless of the ethics and regulations for this type of ‘opportunistic’ shorting, this year’s events have shown that shares remain highly vulnerable to the targeted efforts of short reports. It would appear that the market has favoured a cautious response in each instance, where it almost seems a matter of sell (or short) first and ask questions later. 

Whether this is due to investor nerves around the current bull market and surging valuations, the jury is out. However, with regulators unable to control the release of these short reports, companies require an effective public relations response. For investors, when investing in stocks it is wise to consider the implications of this type of research in your trading plan to ensure you are prepared.


Early-stage investors are at the whim of the market

In some quarters, IPOs have long been considered as a liquidity event for their owners. After all, many investors remain sceptical or wary of investing in shares that have not yet listed. It goes some way towards explaining the shallow pipeline of deals that have made it onto the market in recent months, with this year seeing the lowest capital for new IPO share issues since 2012.

Despite the low number of new listings, the results for IPOs this year would suggest it has still been a ‘successful’ year. Investing in stocks like Uniti Wireless (ASX: UWL), Osteopore (ASX: OSX), SplitIt (ASX: SPT), Ecofibre (ASX: EOF) and Next Science (ASX: NXS) could have delivered investors potential triple-figure returns, to name but a few ‘high achievers’. 

This is not to say the market has been supportive of all new listings. There have certainly been a few IPOs fall flat this year. But the broader story in the IPO market and the struggles therein relate to the companies which have not made it to the ASX. A series of high-profile IPOs were cancelled before investors had the chance to trade shares, including the likes of Latitude Financial, PropertyGuru, Retail Zoo, Onsite Rentals, Education Centres of Australia, and MPC Kinetic.

On the one hand, it seems that individuals are as conscious as ever when it comes to investing in shares with lofty valuations that are not yet public. In addition, the failure of international IPOs from Uber, Peloton and WeWork has kept a lid on bullishness towards ‘risky’ IPO investments. It means secondary investors are not necessarily getting caught up in the bull market, while early-stage investors are at the whim of the market. The real lesson here is that there are still many IPOs performing well, at least initially, but the need to exercise careful discretion is crucial.

Investors who backed several companies in the pre-listing stage have faced cancelled IPOs


Final thought

When investing in stocks, it pays to keep an eye on what is shaping the markets. Even if your trading account is not exposed to a particular trend, being aware of broader investment themes in the market will give you greater insight, appreciation and knowledge. This is what you’ll need to recognise future news and events that have the potential to shape your returns, for better or worse.


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