By Gus McCubbing
Energy stocks and a rare earths mining company backed by Gina Rinehart are expected to rebound when the new financial year begins on Wednesday, after facing heavy selling in June from peace talks in the Middle East that sent commodity prices tumbling.
Tax-loss selling, which is typically a major undercurrent of the ASX in the lead-up to the end of the financial year, has been turned upside down by the federal government’s capital gains tax changes, which have made the short-term strategy more difficult for investors.
This year, prime candidates for tax-loss selling – where investors dump their biggest underperformers to offset gains made elsewhere – were hearing implant maker Cochlear and blood diagnostics giant CSL. But after tanking earlier in the year, both stocks soared nearly 20 per cent in June.
“Normally, tax loss selling would really put a foot on the throat of companies like CSL and Cochlear in June,” said Atlas Funds Management chief investment officer Hugh Dive. “But that hasn’t happened, and they’ve actually had a very strong month as investors thought they looked cheap.”
Instead, the worst performing sector on the S&P/ASX 200 Index in June has been energy, having fallen nearly 10 per cent as peace talks between Iran and the US sent oil prices back down to their pre-war levels. That triggered a sell-off in oil and gas giants Woodside and Santos, which fell by a similar amount in June.
But Dive said the stocks were now oversold and could rebound this week, given they had dropped below their pre-war share prices and tensions in the Middle East were still simmering with tit-for-tat attacks between the US and Iran testing a fragile truce.
“Markets have reacted as though Iran has turned into a peaceful and responsibly governed country,” he said.
The mining sector has been the second-worst performer on the local stock exchange in the last month, falling 6 per cent as the iron ore price dropped with easing fuel prices.
‘Coat-tail investing’
Futures for the steelmaking ingredient fell to $US96.95 a tonne in Singapore on Friday, the lowest intraday level since February, and were trading around $US98 a tonne on Monday. Shares of the big iron ore giants BHP, Fortescue and Rio Tinto have all come off between 5 and 10 per cent in June.
The gold price also took a hit this month, to around $US4,000 an ounce, on the prospect of higher interest rates in the US, which makes bullion less attractive than yield-bearing assets like bonds.
ETF Shares chief investment officer David Tuckwell said while the mining sector could rally from July 1, when investors typically clear the decks for a new tax year and start buying again, ASX-listed Arafura Rare Earths was his top pick.
Its shares have fallen 15 per cent this year to reach 23¢ on Monday. That is below the threshold set when Gina Rinehart’s Hancock Prospecting paid for the stock, when it increased its stake in Arafura by contributing $85 million to a $375 million capital raise in May.
The fundraising was anchored by a two-tranche share placement priced at 26¢ per share, bringing Rinehart’s total holding in Arafura to 17.5 per cent.
“Retail investors can start swarming when a stock approaches a billionaire’s entry price, in a process known as coattail investing,” Tuckwell said.
“They assume that if the richest person in Australia, who has some of the world’s best geologists and commodity analysts working for her, has vetted the company and deemed that a fair price, it represents a safe zone.”
Outside the resource sectors, Wilson Asset Management’s Hailey Kim said plastics giant Amcor was her top pick after its shares fell about 12 per cent in the last year.
“The set-up into FY27 looks compelling with falling resin prices delivering relief, while volumes are also recovering from trough levels,” she said. “At current valuations, we think it’s one of the better risk/reward opportunities on the ASX.”
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