Brokers Cautiously Tip Better Things In '95

The Age

Monday January 2, 1995

Malcolm Maiden, Matthew Kidman

After what the sharebroker Mr Peter Burrows calls ``a relentless slide", the Australian sharemarket enters 1995 12 per cent, or more than $50 billion, below the record of 2340.6 points the All Ordinaries index established on 3 February 1994 after rising 176 points in the first 34 days of the year.

Brokers and other experts are far from infallible. They were virtually unaminous at this time last year that the market would stride comfortably forward another 25 per cent or so, to about 2500.

But they are cautiously tipping better things for 1995.

When the market peaked at the beginning of February, the average price-earnings ratio on shares was a daunting 2.8 times, and the All Industrials index was priced at 21.6 times earnings.

High share prices were depressing dividend yields; the industrial index was running at a yield of 3.1 per cent and the average for all stocks was 2.8 per cent.

The riskless 10-year Commonwealth bond was yielding 6.5 per cent at the same time, only a handful of basis points above its low for the economic cycle.

The gun was loaded, and when the US Federal Reserve raised official rates at the end of the first week of February, a brutal squeeze began.

The local market ignored messages from luminaries including the Reserve Bank governor, Mr Bernie Fraser, and the Prime Minister, Mr Keating, that rate rises here were unwarranted. The market was right to do so. Economic growth had returned to the world's key economies with the possible exception of Japan and rates were again headed upwards. As bond prices fell and bond yields rose, sharemarkets were swamped.

At this year begins, the 10-year Commonwealth bond is yielding 9.99 per cent, but the fall in share prices has taken the yield on the All Industrials index up from the end-of-January low of 3.1 per cent to 4.7 per cent. The market's average yield is up from 2.8 per cent to 3.9 per cent, and key sectors have improved sharply.

Higher earnings have combined with lower share prices to also produce more promising price-earnings values. The All Industrials PE has fallen from 21.6 times at the market's peak to 13 times, the average PE is down from 22.8 times to 14.7 times, and the banks are down from 23.5 times to 9.3 times.

The All Resources index stands at 1293 points after a bad last quarter, compared with 1437 points at the end of January, when the market as a whole peaked.

Two key questions for investors in the new year are the direction of bonds and the strength of commodity prices, particularly metal prices.

Metal prices rose sharply in 1994, and mining stocks starred.

The Macquarie Equities strategist Mr David Rickards is not looking for another 1993, when the market rose 40 per cent, but he does expect some kind of sustained recovery to take place in the second half of the year.

``The market will be under pressure for some time yet," he says.

``Bonds will rally in June, July and August while the short-term interest rates will peak in July or August at about 9.5 per cent."

Mr Rickards believes that once this takes place, the stockmarket will begin to make its climb back above its current level of 1912.7 towards the 2000 mark. However, he says last year's high is not obtainable, and about 2250 is a more likely position by this time next year.

Mr Burrows also thinks the market can add about 15 per cent in value and enter 1996 around the 2200 mark.

Others are less sanguine, and even the usually bullish Mr Rene Rivkin said recently that he didn't have too much faith in the market taking off over the first five months of the new year. But a smart investor would buy stocks now for a good return within two years, he added.

There is a more clouded outlook today than three months ago for commodity prices, historically the crucial determinant of the health of the Australian market. The All Resources index was at 1437 points when the market peaked in February, and the Mining index stood at 1134 points.

While industrial shares sold off heavily in the middle of the year, interest in the resource stocks stayed high as metal prices rallied on the London Metals Exchange in the face of evidence of growing economies and renewed demand for raw materials. In the third quarter of the year the Mining index was above 1000 points, and the All Resources index stayed above 1400 points until November.

However, by then, two trends had developed that were bearish for resource stocks. The Australian dollar had broken conclusively through 70 cents and was headed strongly higher, hurting the revenue of the mining companies, which sell in United States dollars. Secondly, the world's central banks, led by the US Federal Reserve, were still forcing interest rates higher, demonstrating their determination to launch pre-emptive strikes against inflation.

The head of equities at BNP Investment Management, Mr Anton Tagliaferro, sees an apparent slowdown in the US economy after successive rises in official interest rates there, and says that as a result there is considerably less certainty about a surge in economic growth and continued strength of commodity prices.

He is not alone in querying whether resource stocks may have run too far, too fast. For many bulls, attention is diverting from the miners to the more heavily sold industrial sector.

The chief industrial analyst at J. B. Were, Mr Craig Drummond, has predicted that 1995 will be a year of moderate growth on the sharemarket, with much of the impetus coming from high-yielding industrial stocks.