The new year has greeted Australian stocks with a bull market but 2016 wasn’t an easy ride.

Last year, the S&P/ASX 200 had 27 instances of a constituent rising or falling more than 20 percent on a single day, data compiled by Bloomberg show. Comparisons with other developed markets in Asia aren’t equal because Japan enforces limits on how much some stocks can move, and the main gauges in Hong Kong, Singapore and New Zealand have 50 members at most.

Still, the Nikkei 225 only had four such instances, based on constituents as of Dec. 31. The benchmarks in Hong Kong, Singapore and New Zealand had none. The variance persists even when M&A-related news is excluded, reducing the events to 17 in Australia. Most of the stock declines were spurred by company-specific profits or forecasts, which typically led to investors bailing en masse.

Part of the reason behind the phenomenon is so-called momentum investing, when investors follow the herd, said Hasan Tevfik, Australia equity strategist at Credit Suisse Group AG.

“Momentum seems to be a much hotter style in Australia,” Tevfik said in a telephone interview. The magnitude of single-session moves may be “less intense” in 2017 because current valuations indicate less group behavior among investors, he said.

Last year was a so-called turnaround year, Tevfik and Peter Liu, a colleague, wrote in a Dec. 15 report. Macroeconomic indicators closely watched by investors started to rebound after hitting lows, they said. Iron ore prices were first to recover, coming back from 10-year lows in December 2015.

“The good news is that turning-point years don’t happen that often,” the analysts wrote.

High PEs

The price-to-earnings ratio for the ASX 200, which has climbed 21 percent since Feb. 12, is forecast to drop to 16.6 this year from 26.1 in 2016, data compiled by Bloomberg show. Investors have reined in their expectations, said Adam Dawes, senior investment adviser at Shaw and Partners Ltd., which manages about A$10 billion ($7.3 billion) in assets.

“There were a few stocks trading on high PEs,” Dawes said. “It comes down to a lot of confidence.”

Mid-cap stocks get “belted” more when investors lose confidence, Dawes said. One victim was the telecommunications industry, he said, pointing to declines in TPG Telecom Ltd. in September and Vocus Communications Ltd. in November.

Another factor contributing to large one-day moves is exchange-traded funds, he said.

“The ASX 200 gets pushed around by a lot of ETFs,” Dawes said.

Source:
courtesy of BLOOMBERG

by Vivek Shankar

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