NAOS News & Insights



September 24, 2017

Livewire | The Most Crowded Trades on the ASX

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A crowded trade appears when so many investors are positioned similarly that liquidity becomes a problem. Bitcoin is the obvious choice globally, but we wondered where the most crowded trades were on the ASX. To find out, we put the question to Greencape Capital, NAOS Asset Management, and Market Matters.

Too many investors in BWX

Ben Rundle, NAOS Asset Management

One example of a crowded trade is BWX who owns the highly successful Sukin natural skincare brand.

The stock has done incredibly well posting an impressive ~300% gain from its $1.50 IPO price in late 2015. The natural skin care segment, however, is becoming a highly competitive category and BWX is now cycling strong comparable sales numbers from previous years.

At the recent full-year result, it was evident that the growth of Sukin was slowing in Australia. The Company is trying to combat this by expanding offshore and into the grocery channel, however, we have seen the danger of soft Australian companies expanding their products offshore and we feel the grocery channel will cannibalise existing sales.

They are also expanding by acquisition, which we see as further evidence that the company needs to find new areas of growth. At a 25x price to earnings ratio, there is very little margin for error, so any slip-up could see the share price re-rate significantly.

Look no further than the big 4 banks

Matthew Ryland, Greencape Capital

We believe the most crowded trade is market ownership of the major banks, by virtue of the large index weight they have both in the ASX and MSCI indices.

In addition, yield based ETF’s have often flooded into these names. A catalyst for this to unwind is the expected moderation in the growth rate of mortgage-related assets. The market has factored in 6-7% mortgage asset growth for the loan books of the major banks. However, as recent history in WA has demonstrated, when investors stop believing house prices rise consistently forever, mortgage asset growth can flat line and indeed turn negative.

After a 25-year housing price bull market fuelled by relatively loose lending practices, mortgage asset growth rates could begin to moderate, leaving bank sector earnings and dividend expectations vulnerable.

Caution is the most crowded trade

James Gerrish, Market Matters / Shaw and Partners

Long cash and long caution seems to be a very crowded trade at the moment. Therefore the market has remained resilient in the face of some reasonably unsettling political and economic ructions.

I’m paddling this boat too and it makes me somewhat concerned that we’re almost drifting along with the consensus call. A few key reasons seem to be underpinning this stance.

  1. The macro dynamic is changing. If low rates = higher asset prices, then higher rates = lower asset prices. You’d be a fool if you didn’t join those dots and kept some cash up your sleeve as a result – how can you explain it away if you don’t?
  2. Each of the main sectors on the ASX smells in some way; Banks are ex-growth and with a fired up regulator and a precarious housing market, what’s the catalyst to buy them?
  3. Resources have turned a corner, are printing lots of cash, but have rallied 20% plus in the last year, and in some cases, multiples of that. We’re all waiting for weakness to buy again.

This leaves the two other key areas. The highly valued growth stocks, and the yield play which both suffer from rising rates more than most. Interest rates are going up, we know that and therefore it becomes harder to justify the huge multiple on some stocks, while the yield names – which are priced like a bond, won’t grow their earnings as fast as global interest rates will rise, so in relative terms, they’ll become less attractive.

The problem with everyone being long cash and long caution is that dips are shallow, and they’re bought into. If we don’t go down on negativity, it only takes a small snippet of more positive news and the chase is on. It’s how major market tops are formed. The key here will be a string of better global growth data, Trump getting his way on tax, and an absence of any political side-show. If that happens, cash will come off the sidelines, and will chase performance – there’s no bigger driver than the old fear of missing out!

Livewire: Published 20 September 2017

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