‘Mixed’ February reporting season sees market shift: Martin Currie

The “mixed but generally positive results” from the February reporting season has seen new opportunities arise for active investors and managers, says the local arm of specialist active equity manager, Martin Currie.

According to Reece Birtles, Chief Investment Officer at Martin Currie Australia, the recent reporting season had signalled a shift in market sentiment that has cemented the rise of passive investing, in addition to “bubble-like conditions waning” and “value and income dominating”.

Birtles found that index, passive or exchange traded fund (ETF)-related flows now account for 25 per cent of daily stock turnover, up by more than 10 per cent from a decade ago.

“We have conducted analysis on the percentage of daily stock turnover attributable to index buying, which includes passive investing and superannuation fund mandates linked to the Your Future Your Super (YFYS) performance test,” Birtles said.

“Typically, when new information about a stock emerges, such as an earnings surprise or a macroeconomic shift, increased trading volume should reduce the influence of index buying on price movements. However, due to the rising weight of index flows, we are witnessing what we call ‘gap pricing’.

“For active managers, these inefficiencies present opportunities. This phenomenon has resulted in inflated prices for the ASX 50’s top stocks, as passive flows push valuations higher while trading volumes decline. When even minor negative news emerges, it can trigger exaggerated price reactions.

“This trend was evident in February, when stocks such as National Australia Bank, Goodman Group, CSL, and Westpac Banking Corporation saw nearly 10% declines within two days, despite only minor earnings downgrades.”

Birtles said companies took a different route in this reporting season when it came to discussing performance; instead of the negatively-affecting ‘external headwinds’, management teams conveyed their confidence and strong belief in ‘growth and investment’.

“Consumer sentiment remains weak, with evidence of continued bargain hunting and trading down from premium to value brands. However, companies appear to be adapting rather than lamenting macroeconomic pressures,” Birtles said.

“Interestingly, topics such as labour and energy costs, supply chain disruptions, and currency volatility – previously dominant themes – received less emphasis. Labour market pressures, in particular, have eased as large government infrastructure projects wind down, reducing competition for skilled workers.

“China remains a wildcard. The country’s steel sector faces overcapacity issues that may necessitate production cuts, potentially affecting Australian mining companies. While demand for electric vehicle (EV) commodities like lithium and rare earths remains robust, it is uncertain whether this will translate into a meaningful uplift for Australian producers.

“However, Martin Currie sees no clear path for corporate earnings in Australia at this stage. Factors such as interest rate policy, Chinese economic stimulus, and US tariff wars all contribute to uncertainty.”

Birtles indicated that value investors may benefit from “fertile ground”, especially in more “defensive, high-quality opportunities”. However, active investors and managers could be set for a comeback by capitalising on “mispricings in the market” as fundamentals return to the foreground.

“This current extreme valuation spread is more reminiscent of the Tech Bubble rather than the crisis conditions seen during the GFC or COVID-19 downturns,” Birtles said.

“To us, the factors driving market returns and the sentiment change during February’s reporting season is a sign that prices are reconnecting with earnings and fundamentals and that wide valuation spreads will soon begin to narrow, and history has shown us that as they do, it can mark the beginning of extraordinary outperformance for value investors for the next 12-18 months.”