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Highlights
- ASX index briefly entered correction territory last week
- Large-cap stocks may still be trading at a premium
- Small caps offer selective value, but come with higher risks
Australia's sharemarket experienced a brief correction last week, with the S&P/ASX 200 index dipping over 10% from its February peak to hit 7733.5 on March 12. Although the market has since rebounded, concerns remain about the sustainability of such movements and whether current levels offer genuine value for long-term investors.
The downturn followed global economic tensions, notably the move by former U.S. President Donald Trump to rule out tariff exemptions for Australia and threaten increased levies on steel and aluminium imports from Canada. These developments sparked broader market jitters and a pullback in major indices, including the ASX.
Despite the decline, market analysts warn that this dip shouldn't automatically be viewed as a chance to buy in. The concern is that many of the ASX’s most prominent stocks may still be trading at inflated valuations. According to strategist Lochlan Halloway, while the index may have corrected by 10%, the broader market could have been overvalued by as much as 30% prior to the fall. That means even after the correction, equity prices might still be trading at a premium of around 20%.
Several top-performing stocks that dominate the index, such as Commonwealth Bank of Australia (ASX:CBA), BHP Group (ASX:BHP), and CSL Limited (ASX:CSL), have historically contributed significantly to market gains. However, these same heavyweights may now be priced beyond their intrinsic value due to strong investor demand and concentration in cap-weighted indices.
For those searching for potential value, attention has turned to smaller companies listed on the ASX Small Ordinaries index. This segment includes emerging businesses like Xero (ASX:XRO) and BrainChip Holdings (ASX:BRN), which operate outside the ASX 100. While this area may provide more attractive pricing, it is also fraught with higher risks. Many of these companies, particularly in sectors such as mining and tech, remain unprofitable or highly speculative.
The challenge with small caps is the quality of the index itself. A significant portion of these businesses are early-stage explorers or companies with unproven models. As a result, while some hidden gems may exist, a broad-based approach to this sector could expose investors to volatility and underperformance.
In the current climate, a more cautious and selective approach may be warranted, especially as fundamentals haven’t materially shifted. While the headlines suggest a discount, not all markdowns are true bargains.
