Rudi’s View: Is Buy The Dip Changing Markets?

Rudi's View | 10:00 AM

In today's Weekly Insights:

-Is Buy The Dip Changing Markets?
-Compare The Pair: Expensive Versus Cheap

By Rudi Filapek-Vandyck, Editor

Is Buy The Dip Changing Markets?

Whenever something happens to financial markets, analysts and market participants often seek guidance from the past in order to assess what might plausibly follow next.

But, of course, the past does not always provide us with an accurate blueprint for the future. Investing is not that easy or straightforward.

One case in point could be this year's rapid sell-off in response to President Trump's US import tariff announcements earlier.

History shows equity markets tend to revisit the initial bottom before embarking on a new, sustainable uptrend.

Indeed, recent research by Longview Economics again confirms out of the 15 sharp pullbacks in the S&P500 between 1978-2018 no less than 13 of these saw the index put in a recovery rally, followed by another sell-off to revisit the prior low, before recovering more convincingly.

Longview's analysis concentrated on pullbacks of at least -10% so this year's sell-off would fit in with the historical pattern. Except for the fact indices have thus far only moved into one direction, and that is as far remote from their April low as possible.

This raises the obvious question: can history be our guide? Should investors expect another deep sell-off to similar magnitude as happened earlier?

Answering the question is no longer as straightforward as might previously seemed the case (apart from the fact that history is never a one-on-one for the future and there were two exceptions in Longview's data-analysis).

Observation number one is that share market recoveries seem to be happening at much faster speed than in the past.

As also pointed out by other market observers, share markets in 2025 have pretty much made up for all previous losses in circa 1.5 months. This is one of the fastest recoveries in history. But wait, there is more...

Since covid hit the world in 2020, share market sell-offs are no longer adhering to their historical pattern. The one key change, or so it appears, is recovery rallies are no longer followed by a deep pullback to re-test the previous bottom.

The March 2020 sell-off did not see a subsequent retest of the bottom, and neither did the Yen carry trade-inspired turmoil that hit markets in August last year.

Longview argues share market pullbacks in 2022 should be seen as part of a cyclical bear market, thus not representative of general trends and context in 2025.

Have markets fundamentally changed in their response to risk-off sell downs?

There are probably multiple reasons as to why this could be the case (assuming no economic recessions are on the horizon).

My own favourite explanation would be that passive investing and buy-the-dip money inflows might by now be large and influential enough to move markets higher ahead of active managers who are still largely biding time on the sideline.

As with every other interpretation of changing market behaviour, time will tell.

(None of this means markets will only move into one direction from here onwards, in particular not when economic data start showing weakness).

Compare The Pair: Expensive Versus Cheap

Ever walked into your local supermarket to find heavily discounted strawberries on prominent display while farther down the aisle you pay double the price for a similar looking bucket?

If you do fall for the extra-advantageous offering, you'll find there's not much healthy life left in those cheaply-priced berries. You better start eating them now!

On more than just a few occasions, the offerings put forward by the share market are made up of similar underlying characteristics, which is why buying the 'cheaper' looking option available is not always the best decision for an investor to make.

Recently my mind wandered off to private hospital operator Healthscope, whose valuation discount between 2014 (ASX re-listing) and 2019 (acquisition by private equity) vis a vis the much larger Ramsay Health Care ((RHC)) was often touted as a signal that investors had been under-appreciating Healthscope's true potential.

Since then, Ramsay Health Care has had its own struggles and today's share price is reflective of that reality. But fully privatised Healthscope might be on the verge of collapsing under $1.6bn in debt, leaving its ASX-listed landlord unable to collect current and outstanding rent payments.

I cannot help but think that relative valuation discount would have only grown larger had Healthscope remained a publicly listed company.

A similar observation can be made regarding Ainsworth Game Technology ((AGI)) which since 2002 has presented itself as the cheaper-priced alternative for multinational Aristocrat Leisure ((ALL)), but seldom has this resulted in higher investment rewards for those taking the leap.

It certainly never resulted in sustainably higher rewards as that share price has effectively known one direction only --southwards-- since 2013. Similar as with Healthscope six years ago, Ainsworth Game Technology is likely to be privatised and de-listed later this year, as suitor/majority shareholder Novomatic has finally bitten the bullet.

US-headquartered Light & Wonder ((LNW)) also trades on lower multiples than Aristocrat, while offering higher growth potential given a smaller size and post corporate re-invention, but reality on the share market has proved noticeably more challenging. Post sell-off, the shares are still up some 30% since early 2023 but shares in Aristocrat have doubled.

For good measure: Aristocrat has taken its smaller challenger to court, and won, which explains part of the discrepancy, but recent results also revealed there's no escaping general industry challenges and investors are prepared to put more faith in Aristocrat's decade-long track record that has made it one of the local success stories from the past ten years and beyond.