ASX 200 falls: Why bargain hunters are sitting it out

Bargain hunters failed to appear on the ASX yesterday, perhaps because Monday’s ‘dramatic drop’ was not so dramatic.

Despite Monday’s 2.2 per cent fall in the S&P/ASX 200, rational investors see stocks in the index as dotted with risk.

So why did the bargain hunters fail to appear on the ASX yesterday? Perhaps because Monday’s “dramatic drop” was not so dramatic — in the end it was a mere 2.2 per cent, and for most investors share prices at these levels are still too expensive.

Moreover, there is little doubt that investors are all too aware that it is the final quarter of the calendar year — specifically September and October — when stockmarkets historically have their worst downturns.

Either way, rational investors see the ASX 200 as dotted with risk as bank stocks — which account for about a third of the market — continue to struggle and a much-anticipated rebound in the resources sector sputters. BHP fell twice as hard as the wider market earlier in the week.

On the plus side, there are clear signs that industrial stocks, consumer stocks and small caps are ­attracting investors.

Stuck in the middle are so-called “defensive stocks” — A-REITs (property trusts), broader financials and blue chip industrials.

As the ASX 200 languishes at 5214, having climbed all the way from 4700 earlier in the year (but still a long way off the 6000 it nudged in March last year), wealth advisers yesterday pointed to two key issues facing stocks.

First, intense concerns over monetary policy: the fear that the European Central Bank or Bank of Japan is struggling to extend stimulatory policies while the US Federal Reserve finds the task of lifting rates exceptionally delicate.

Second, the lack of a “catalyst” for stock prices on the Australian market as earnings continue to disappoint in many sectors and the outlook for further interest rate cuts is clouded. HSBC chief economist Paul Bloxham has gone as far as to suggest there won’t be any more cuts in the current cycle.

Yet advisers continue to recommend the stockmarket for dividend income as cash rates remain at rock bottom. Advisers put retail investors into the market primarily for the strong dividend yields — still in excess of 4 per cent a year — being paid, on average, among blue-chip stocks.

The immediate problem for this investment strategy is that some of the favourite yield payers — such as Telstra — are clearly struggling under current conditions and a fully franked dividend yield of more than 4 per cent is ­little consolation if the underlying price of the stock is falling over the course of the year. Telstra is paying a 6 per cent dividend yield at a stock price of $4.94, but it started the year at $5.58.

Specialist “value” investor David Walker of Clime says prices are elevated but not extreme. “We saw some value in the market during the rout and we were in there buying selectively …. and if the market falls again, we will be in there again,” he said.

Certainly, the next few weeks will test the forbearance of all share investors — but then again, there are always champions: CBA this week celebrates 25 years as a listed stock since it listed at $5.40 in 1991. The bank closed yesterday 1 per cent lower at $69.50, but is an inspiration for any investor … even at this time of the year.