Buying the dip in ASX shares? A word of caution from top brokers

ASX shares have come under pressure in 2022, following on their 21-month long post-pandemic charge higher.

Up 2.1% over the past 5 days, the S&P/ASX 200 Index (ASX: XJO) remains down 5.5% for the year.

And it’s been far tougher for tech shares.

The S&P/ASX All Technology Index (ASX: XTX) is down 20.5% since the opening bell on 4 January.

Why are ASX shares under pressure this year?

The first force to batter ASX shares in the New Year was the dawning realisation that inflation is rising faster, and likely to be more persistent, than most economists had forecast last year. That’s brought forward likely interest rate rises from central banks across the world. And this has hit growth stocks – like many ASX tech shares – particularly hard.

The second negative force dragging on ASX shares is nuclear armed Russia’s initial aggressive posturing and then outright invasion of Ukraine.

Together these forces have seen stocks sell off across the world.

The US S&P 500, as an example, is down 8.5% year-to-date.

When markets are down, investors begin to ponder whether the time is right to step in and buy the dip.

Now there are almost certainly some specific ASX shares poised to outperform from here. But some of the world’s top brokers are cautioning that entering the market today may be more like catching a falling knife than buying the dip.

Brace for more volatility ahead

Lisa Shalett is Morgan Stanley’s chief investment officer of wealth management.

Shalett said that, despite the recent market rebound since the initial selling on news of Russia’s invasion, “volatility will likely remain elevated, and both the political and economic situations are in flux”.

With uncertainty about the duration of the war in Ukraine and how long it may impact the market, Shalett added, “We don’t believe now is the time for eager buyers to enter what might look like an oversold market.”

Morgan Stanley is wary of 3 other challenges that could linger for a while. Namely:

• Uncertainty and complexity of the US Federal Reserve’s policy-tightening path
• Potential weakening of demand for goods consumption
• Inflation’s pressure on corporate profit margins

With that in mind Shalett said:

We advise investors against jumping back into the market, even though recent declines have made valuations look more attractive. Investors should watch earnings-revision trends and bond-market dynamics to gain conviction around a buyable bottom.

While she wasn’t specifically addressing ASX shares, for those investors who are looking to add to their holdings, she added, “Consider recalibrating expectations and sticking with quality names with strong cash flow and earnings achievability that aren’t fully priced.”

Chris Nicol, Morgan Stanley’s chief Australian equity strategist, noted that even if Russia’s conflict with Ukraine abates, the spectre of central bank policy tightening will not.

According to Nicol (quoted by the Australian Financial Review):

The sobering thought is that the relief that initially comes from any moderating of geopolitical risks is likely met with the reality of more persistent inflationary signals and sustained resolve in central bank intent to normalise monetary policy settings.

This would take investors back to a future heavily influenced by rising yields and rising rates – a future that was being actively rotated towards in the first six weeks of this calendar year.

As for specific sectors that could offer some good stock-picking ideas, Shalett named financials, energy, materials, consumer services and healthcare.

Rocketing oil prices could drag on ASX shares

While soaring crude and LNG prices will offer tailwinds to ASX energy shares, many ASX shares could be negatively impacted.

Goldman Sachs economist Dominic Wilson points to the potential for continued high oil prices coupled with likely tightening from central banks like the US Fed as reason for investors to be cautious.

According to Wilson (quoted by the AFR):

We think the market may be underestimating the risks of tighter supply on oil pricing, which remains a key risk from the ongoing conflict – so we think the risk premium here should probably be larger.

And we think the market is starting to overestimate the impact that the conflict will have on the Fed trajectory, and so think that front-end rates are ultimately likely to reverse this recent rally.

Despite the obvious uncertainties that the invasion brings, those two areas are likely to remain important themes in our market forecasts.

We’ll leave off the cautions for buying the dip in ASX shares or international equities with JPMorgan.

Among their top concerns, the broker’s analysts believe fast rising crude prices will further drive up inflation.

Comparing the war in Ukraine to the 1990 Gulf War, which saw US markets nosedive, JPMorgan’s analysts said, “We see the risk/reward scenario clearly pointing to further downside near term: The maths suggests there is further downside ahead … and it may not be small.”

The post Buying the dip in ASX shares? A word of caution from top brokers appeared first on The Motley Fool Australia.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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