Man the lifeboats, it’s Red October

Red October is holding true to its reputation with the nation’s share market a sea of red ink. In fact this week the market was within a few points off hitting a major correction point – 10 per cent below from its previous peak.

Whether the international forces buffeting Australia shares – the threat of higher interest rates in the US, slow growth in China, fears of a triple dip recession in Europe, not to mention Ebola fears and the spreading conflict in the Mid East, are outside our control it is also demonstrating a glaring weakness in the Australian share market – a lack of diversity.

When you consider that the four major banks, global miners Rio and BHP, plus Telstra nearly control half of the share market’s major index through their respective weightings, it was only a matter of time before the planets aligned to send the market lower.

Now everyone wants to know where the next growth spurt is going to come from? Bank are facing a flattening mortgage market and fighting off calls for them to tighten their capital requirements, our big miners are facing a retreat in commodity prices globally, and Telstra has been fully priced as investors chase its solid yield performance.

While the market has embraced a rush of new listings and turnarounds this year, i.e. Healthscope and Spotless being some of the bigger ones with Medibank still to come, it looks like the ASX might actually contract by calendar year-end as more companies fall into the arms of competitors or opportunistic venture capitalists.

And I can’t see that IPO pipeline staying open that much longer if the pessimism on the market continues. Already some of the bigger IPOs seem to be pushing back into 2015.

So where to invest? The myriad of self-managed super fundies have all voted for tax-effective investment property, and done well as prices have chased supply. But that supply is pumping up to such an extent that rent yields are coming under pressure. There could be some pain ahead if interest rates rise.

So what will that happen? The Reserve Bank is being cautious here, as it wants building companies to maintain activity as the resources sector transitions from its investment stage to a supply stage.

My guess is that the investors will be chasing yield where they can find it and that means another look at the share market as price-earnings multiples return to normal and dividend returns become even more attractive. Defensive stocks, particularly good second-liners, might be back in vogue.

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