History shows that weakness in the May-June period is a rich source of opportunity for investors as fundamentals re-assert themselves over short-term sentiment. With this in mind we are readying ourselves to buy our preferred industrials, and we flag four stocks we are happy to buy now.
Sell in May and go away?
Australian shares display material seasonal weakness in May-June, propagating the old investing adage "Sell in May and go away". There are several plausible contributors:
- Seasonal commodity weakness;
- selling to offset taxable income ahead of the End of Financial Year;
- selling to clean up portfolios ahead of the End of Financial Year (in Australia) or summer holidays (offshore); and
- potential uncertainty around the Federal Budget.
Resources sector – the correction arrives early
ASX resources stocks surged 17% post Trump's election in the US, but peaked in February and have now given up almost all of those gains. Commodities and mining stocks are responding to falling Chinese steel prices and their own seasonal drivers, albeit earlier than expected this year. This is most likely a function of speculation running too hard on Trump's reflationary promises to begin with.
We now see strong value in our preferred resources names and advocate layered buying though the seasonal lull. Morgans clients can login to access our list of preferred resources stocks on page two of our detailed Australia Strategy report.
Ready to buy our preferred Industrials
It's conspicuous that, while resources stocks have corrected, industrials have rallied close to all-time highs (see chart):
To us this feels too complacent given modest profit growth, abnormally low trading volatility and with geo-political risks in play. We see a risk that the resources pullback and/or typical seasonal drivers could trigger an industrials correction.
Potential seasonal weakness shouldn't alter the investing strategy of long-term investors. However, with ASX industrials stocks looking toppy we are thinking more tactically through this May-June period. Temporary seasonal weakness can often occur without any change to company fundamentals, and this can deliver a rich source of opportunity for investors.
We have created a shopping list for Morgans clients of industrials stocks to watch on a possible pullback, while we also flag four stocks we are happy to buy right now:
- Bapcor (BAP)
- Orora (ORA)
- APN Outdoor (APO)
- Aveo Group (AOG)
Morgans clients can login to view our shopping list of industrials stocks on page two of our detailed Australia Strategy report. Alternatively, please contact your nearest Morgans office for access.
Disclaimer(s): Analyst may own shares in some or all of the companies mentioned.
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.