Brokers Say Rates Threaten Equities

The Age

Friday December 29, 1995

Patrick Donovan

The Australian sharemarket surged through 1995 on the back of strong world commodity prices, low interest rates and a buoyant global economy. But with the major economies now in the midst of a growth slowdown, rising interest rates could pose the biggest threat to equity markets, say stockbrokers.

Three leading brokers said improved growth rates would put upward pressure on interest rates and offer investors an alternative to shares. They said the market would continue to improve, but differed on the election's impact.

J. B. Were Stockbroking's managing director, Mr John Patterson, said the United States economy would be the major factor influencing the Australian sharemarket: ``. . . (it) will have finished its slowdown in the first half of '96 and will actually pick up a bit in terms of its momentum, which will clearly be good for Australian resource stocks, but it will also have a tendency to lift the whole market," he said.

Mr Patterson said this strong growth would produce the biggest threat. ``If we come to the end of the period where interest rates have been pretty predictable and stable and start to rise again, then Wall Street's bullish run might come to an end." This would not happen in the first half of the year as money supply was growing.

He said slowing European economies, the US banking sector's problem property loans and a weak domestic economy in the March quarter could all pose a threat to the sharemarket in 1996.

The base metals sector should have a good phase in the middle of the year, with Western Mining providing the best value, and the media sector would continue to perform, with News Corp continuing to be the pick of the bunch. ``With changing technology there is tremendous growth potential in the media sector." Mr Patterson said the banks would still provide a good option in the first half of 1996.

Austock's director of research, Mr David Perry, predicted a modest improvement in the Australian sharemarket. He said the major force behind the bullish market in 1995 was the lower interest rates, which kept bond yields at the lowest levels for 20 years.

``The biggest risk in 1996 will be if US interest rates rebound," he said. ``. . . This could be sparked off by an external shock; it could be a pick up in US growth rate, it could be some bad inflation numbers . . . The US sharemarket is not grossly overvalued, but it is vulnerable to any kick up in US rates that would flow pretty quickly to our market.

" Mr Perry said the federal election and US election would have little impact on sharemarkets.

Domestic wage restraint and lower inflation were needed for the Australian sharemarket to thrive next year. ``If this happened, interest rates would come down, confidence would be revised and the economy would pick up," he said.

``At the moment, the only reason we're not having a rate reduction like most other countries is that our inflation is a bit too high."

Mr Perry said companies such as Leighton, Century Drilling and Macmahon would be the top performers in 1996. ``Commercial construction is experiencing a cyclical upswing, and will receive assistance from the run-up to the Sydney 2000 Olympics.

The mining sector remains buoyant and mining services and contracting is a growth sector."

Mr Perry said the insurance sector would be strong, suggesting QBE for long-term growth and GIO for yield. Companies involved in gas, such as Santos and AGL, could also be fruitful investments, he said.

There were a number of small companies that would perform well because they had strong market niches, which would insulate them against competition such as Vision Systems, Solution 6, Skilled Engineering, Incitech, Evans Deakin, he said.

``With a few exceptions, however, we recommend waiting until there is clear evidence of a turnaround in profits and at least the initial signs of a relative recovery in share prices, " he said.

Mr Lawry Bugeja, James Capel Stockbroking's senior institutional dealer, predicted a slow start for equities in 1996, but he said the market should pick up momentum in the second quarter.

He said resource stocks would continue to thrive under the recent spate of interest rate declines. ``Because of our situation as a fairly significant resource-based economy, together with a large industrial base, I think we'll prove to be quite attractive in foreign eyes at some point . . . next year."

But, he said, this would depend on the currency and interest- rate levels. ``I think if we follow through with (interest rate) cuts in the March quarter, and I think that will happen leading into the election, then we could be off and away again.

" He added though that the scheduled federal and state elections could be detrimental to the market.

Of the industrial stocks, ANZ, Boral and TNT would perform strongly, he said.

Of the resource stocks, BHP, Normandy, Capral, QNI and Oil Search were the picks of the crop.