We have been conditioned to expect retailers to offer discounts at the end of the financial year (EOFY) and the share market is no different as this time of the year can throw up some interesting bargains.
This is because fund managers and other professional investors tend to behave in certain ways as they close out their books for FY18 before the upcoming 30 June deadline.
The analysts at Macquarie Group Ltd (ASX: MQG) believe everyday investors can benefit from this as they have identified some seasonal trading patterns around this time of the year.
"Our research shows that investors crystallising losses to reduce their Capital Gains Tax put pressure on low Momentum stocks," said the broker.
"In addition, they are also more likely to sell high risk and low quality stocks in June, which benefits the Low Risk factor. This trend reverses in July, when investors deem their investment horizon to be longer."
Low momentum stocks are those that do not move as much in a strongly trending market. As they tend to lag in a rising market, these stocks tend to be value plays given that they don't trade on high multiples due to their share price performance.
This implies that the market will favour value stocks over growth stocks early in the new financial year, although Macquarie thinks high momentum stocks can continue to generate good returns in FY19 as well.
The broker also thinks that small caps could lag the market as they tend to fall into the higher risk and lower quality category.
Investors looking to buy smaller stocks may want to hold off until July when selling pressure eases. This is also probably true for equities in general given that May and June tend to be a weak period for the All Ordinaries (Index:^AORD) (ASX:XAO) and S&P/ASX 200 (Index:^AXJO) (ASX:XJO).
Macquarie compiled a list of stocks that are most likely to benefit from this season effect and is urging investors to buy these stocks.
Some of these stocks include milk supplier A2 Milk Company Ltd (ASX: A2M), blood plasma group CSL Limited (ASX: CSL), fresh fruit and vegetables distributor Costa Group Holdings Ltd (ASX: CGC) and mining giant BHP Billion Limited (ASX: BHP).
On the flipside, some of the stocks that are most at risk of underperforming are intellectual property services group IPH Ltd (ASX: IPH), fast food chain Domino's Pizza Enterprises Ltd. (ASX: DMP), pet products and vet services group Greencross Limited (ASX: GXL) and childcare operator G8 Education Ltd (ASX: GEM).
Macquarie had a "netural" recommendation on these stocks.
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