Taking Stock 26 June 2025

Fraser Hunter writes:

WHEN I first entered the investment industry, I had a well-ingrained value bias. I looked for bargains - companies on low P/Es, high dividend yields, and trading well below what I, and market analysts, thought they were worth.

Part of that bias still exists. But like most investors, my process and beliefs have evolved. Time, market experience and lessons learned have all shaped the way I invest.

Being value-minded, and given the nature of the NZ market, it didn’t take long to discover the wild west that is the ASX. With over 2,000 listed companies and a highly active retail trading community, it's a very different landscape.

One of the more unusual trends I came across early on was tax-loss selling. It sweeps through the ASX like clockwork every June, as Australian investors offload underwater positions. Often, the intention is to buy them back after 30 days.

Initially sceptical, I soon discovered the pattern was not only real but well documented. It is supported by research and prevalent in other countries with similar tax systems.

It was also a timely reminder that markets are not always efficient. Prices can be distorted by a number of factors such as tax timing rather than company fundamentals.

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WHILE a capital gains tax remains politically sensitive here (for now), it is a standard feature of most developed economies.

In Australia, realised capital gains are taxed as income, while realised losses can offset those gains if crystallised before 30 June.

This creates an incentive for retail investors, high-net-worth individuals and self-managed super funds to sell underperformers. After a 30-day stand-down period, required to meet "wash sale" rules, the positions can be repurchased.

Selling volumes tend to be higher in strong markets, particularly when investors are sitting on large gains elsewhere. While unused losses can be carried forward, the urgency is greatest when profits are high.

June 2022 saw one of the heaviest sell-offs in recent history, driven by quick gains from the post-COVID rebound. With the ASX 200 up about +8% this financial year, June activity has again been steady.

Although most tax-loss selling takes place in June, some of it has crept earlier, starting as early as April for certain stocks.

Self-managed super funds, which manage over A$800 billion (the NZX50’s total market cap is ~NZ$150 billion) are active year-round. Crystallising losses helps reduce tax liabilities on their pension income. Managed funds also take part in June, both to offset gains and to window-dress portfolios by removing weaker names from their records before client reporting is due to print.

The mechanics are straightforward. Concentrated selling of loss-making positions, sometimes combined with short selling, can push prices well below fair value. This is especially true in less liquid stocks. Strong businesses can get dragged down alongside genuine underperformers.

A rebound is not guaranteed. But studies show that quality companies often recover in July, while the weakest continue to struggle. Distinguishing between value and trouble is key.

Historically, June has been one of the weakest months on the ASX. Since 1992, the ASX 200 has fallen an average of -0.7% in June, while May has averaged minus -0.6%. By contrast, July has averaged a gain of more than +2% and has delivered positive returns for 11 years straight. This has been framed as the Australian equivalent of the “January effect” seen in US markets.

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FOR New Zealand investors, the rules are different. We are not incentivised to sell, but stocks we hold or want to hold can still be affected by the sell-off across the Australian market.

That means May or June might not be the best time to offload a weak position. On the other hand, these months can offer the chance to pick up good companies that have been temporarily oversold.

As a simple screen, I looked at ASX 200 stocks that had fallen sharply over the past 12 months but still had a buy or strong buy rating from analysts and were growing revenue year on year. Among the top 50 large caps, only Woodside (WDS.ASX) and CSL (CSL.ASX) met the criteria.

I tend to exclude energy stocks, where commodity prices often have a greater short-term impact than tax selling. This has played out recently, with Middle East tensions lifting energy stocks.

CSL, however, stands out. It has underperformed of late, but over the past 15 years has delivered more than 15% per annum in capital gains, achieving similar rates of revenue and earnings growth. While growth has slowed as the company has matured, it is still forecast to grow earnings at a double-digit pace over the next five years. CSL remains a high-quality, well-run company with a global footprint that is hard to replicate.

Mid-cap names that also meet the same criteria and have appeared in media coverage of tax-selling candidates include Treasury Wines (TWE.ASX), Viva Energy (VEA.ASX), AMP (AMP.ASX), Flight Centre (FLT.ASX), HMC Capital (HMC.ASX) and 2024’s well-loved IPO, Guzman Y Gomez (GYG.ASX).

Some NZ companies may also have been caught up in the selling, mainly due to their dual listings. These include Spark (SPK.NZ), SkyCity (SKC.NZ), Heartland (HGH.NZ) and Fletcher Building (FBU.NZ).

Spark has faced a series of downgrades and a weakening outlook over the past 18 months. It has long been popular with Australian fund managers for its dividend yield and strong market position. Despite a weak result in February, and subsequent sell off, the share price has tracked upward through to June.

SkyCity has had well-publicised challenges. These include a legal dispute with Fletcher over the Convention Centre delay, as well as tougher AML rules across the casino industry. These have led to fines, higher compliance costs and reduced customer activity.

Fletcher Building had been relatively stable through the year, but a downgrade at its recent investor day triggered renewed selling.

Heartland is less likely to be on Australian investors’ radar due to its smaller size. That said, its shares are trading well below February levels following a disappointing result, and could be being cleaned out of portfolios.

This article is not personalised financial advice. The stocks mentioned are not recommendations but simply examples that stood out during the current sell-off.

Tax-loss selling can create opportunity, but it requires discipline. The best outcomes tend to come from focusing on quality businesses that have been temporarily oversold, rather than chasing every falling price.

Tax-driven selling is a well-known and recurring pattern. The discounts can be meaningful, but it is only one of many forces that influence market prices.

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Travel

• Auckland (CBD) – 27 June – Edward Lee• Palmerston North – 1 July – David Colman• Lower Hutt – 9 July – Fraser Hunter• Christchurch – 23 July – Fraser Hunter

Please contact us if you would like to make an appointment to see any of our advisers.

Fraser Hunter

Chris Lee & Partners