Beaten Down Aussie Stocks in for ‘Winter Wonderland’

A retiree watches stock prices on the Australian Stock Exchange (ASX) in Sydney, Australia.
Torsten Blackwook | AFP | Getty Images
A retiree watches stock prices on the Australian Stock Exchange (ASX) in Sydney, Australia.

Australian equities appear to have fallen out of favor with investors, with the country's stock market falling almost 7 percent since mid-May, wiping out a sizable portion of the year's gains.

With the country's economy looking increasingly fragile, given the slowdown in both the mining and consumer sectors, is the market in for heavier losses in the new month?

(Read More: Australia Coal Firms Dig in for Years of Mine Closures, Job Cuts)

"Winter is here [in Australia] and we are asking the question, will it be a winter wonderland for the ASX [S&P/ASX 200] or a winter north of the wall? We think it will be a winter wonderland," wrote Evan Lucas, market strategist at trading firm IG Markets on Monday. 'North of the wall,' a reference to the popular U.S. television show 'Game of Thrones,' is an area known for its harsh and bitter climate.

A combination of China's better-than-expected official purchasing managers index (PMI) reading for May and supportive credit conditions in the world's second largest economy – which is Australia's top trading partner – will be positive for resource stocks, he noted.

China's official PMI rose to 50.8 in May from 50.6 in April, outpacing market expectations and raising optimism that the economy may be stabilizing. However, the HSBC PMI released on Monday showed a reading which was the worst since October last year.

"The advantages for the ASX is that credit in China is still supportive, as is housing growth. The inventory cycle and the over-supply we have seen is also coming to an end as China holds firm," Lucas added.

Total Chinese social financing, a broad measure of credit, grew 58.2 percent in the first quarter, compared to the same period a year earlier.

Last week, U.S. investment bank Goldman Sachs recommended investors rotate out of Australian banks into resources on the back of weakness in the Australian dollar and improving global growth.

Later Monday, the Reserve Bank of Australia is due to release its monthly index of export prices of commodities for the month of May, which will serve as an indicator for how the sector is faring, he noted.

(Read More: More Rate Cuts in Australia? Here's Why Not)

Commodity prices play a key role in Australia's economy, which has seen resources-led growth over the past several years.

"If we see moderate growth it will add support to the idea that second-half earnings could meet expectations and see the ASX having a winter to remember," he said.

Sell-off in Defensive Stocks Overdone?

The recent sell-off has been led by defensive stocks including high dividend paying banking and telco plays that have powered the uptrend in the benchmark S&P/ASX 200 in the recent months.

(Read More: Consumer Apathy: Next Threat to Australian Economy?)

Telstra, for example, has declined 8 percent in the past two weeks, while National Australia Bank has fallen 11 percent over the same period.

Lucas, however, believes banks may now be viewed as a buying opportunity, adding that volumes that have exited banks have come to a "point of exhaustion."

"There is plenty of investors that have been looking for 'cheap' points of entry for 12 months as the banks ran away from them. This pull-back will see a lot of retail investors jumping in, chasing the earning streams on offer from the banks," he said.