Australian equity markets are poised for a potentially strong start to the week, buoyed by positive sentiment from Wall Street. Overnight data revealed better-than-expected US inflation figures which propelled the US market to new highs, suggesting a resurgence of bullish momentum after a period of uncertainty. These gains come as Goldman Sachs’ local strategist Matthew Ross highlights the remarkable performance of lower-quality stocks on the ASX in recent months.
Ross has been tracking what he terms the “dash for trash,” observing that a basket of local stocks characterised by high debt and poor profitability has surged nearly 90 per cent in the past six months. Similarly, Goldman’s basket of the most shorted ASX stocks has rallied approximately 65 per cent over the same period. According to Ross, these stocks have collectively contributed to the ASX 300’s rise of about 20 per cent since April. He notes that these riskier stocks have reacted positively to less-than-feared US GDP data, smaller tariff impacts, and signs of resilience in the Chinese economy.
Despite the recent rally, Ross cautions that the broader macroeconomic outlook remains mixed, both domestically and internationally. He points to concerns about the reliability of US GDP figures and mixed signals from the Australian job market and Reserve Bank regarding inflation. Moreover, he notes that trading updates during the annual general meeting season indicate that companies are focused on cost-cutting and returning capital to investors rather than re-investing, suggesting modest earnings recovery on the ASX. Goldman Sachs anticipates that the risks to stocks are negatively skewed, and the probability of a major equity market rally from this point is low.
Given the recent outperformance of lower-quality stocks, Ross now favours defensive, high-quality stocks that have lagged in the rally. These include names like CSL, a biotech giant which researches, develops, manufactures, and markets a range of biotherapies derived from human plasma and related products, as well as ResMed, a company focused on developing medical devices to treat sleep apnea. Other stocks on his list include Aurizon, Qube, AUB Group, NIB, Steadfast, Amcor, Orica, Challenger, Carsales and Aristocrat Leisure.
