Concerns are mounting over a potential bubble in the Australian sharemarket, fuelled by a sharp rally in unprofitable ASX-listed businesses. Research from MST Marquee reveals that 36 companies within the S&P/ASX 300 are currently not making money. This group, dubbed “birds without wings”, has surged by 30 per cent in the last six months, significantly outperforming the broader market’s 13 per cent gain.
According to MST senior analyst Hasan Tevfik, such a strong rally in loss-making companies is a key indicator of “frothiness” in equity markets. Historically, similar surges have only occurred during periods such as the dotcom bubble, the global financial crisis, and the pandemic – all of which were preceded by significant economic downturns. The presence of these risky stocks may leave investors exposed to a market correction, especially given the gains in other speculative assets like bitcoin and meme stocks.
Tevfik suggests investment banks may be contributing to the issue. He claims analysts often encourage investors to buy shares in these loss-making companies because brokers earn fees when the businesses need to raise capital. Currently, sell-side firms have a “buy” recommendation on two-thirds of the ASX 300’s unprofitable stocks, compared to just over half of the profitable companies.
Several fund managers are now reducing their exposure to technology stocks due to the current market exuberance. Hedge funds such as QVG Capital and Totus Capital are actively avoiding areas of “froth”, including artificial intelligence and defence companies, signalling a shift towards more conservative investment strategies. This includes companies like Mineral Resources and Pilbara Minerals who are commodity producers, tech stocks such as NextDC, and healthcare companies such as Healius.
