Upbeat Analysts Tip Smoother Ride For Coming Year

The Age

Sunday June 29, 1997

David Saunders

Metals, building materials and retail stocks are where the smart investment money will head over the next 12 months, according to brokers and equities strategists.

As the 1996-97 financial year draws to a close today, brokers believe the sharemarket will continue to rise, although it is unlikely to sustain the pace of the past 12 months.

Broking houses are generally optimistic about the investment outlook, saying the economic environment, both here and overseas, is likely to remain benign.

Most have a mild preference for resource companies, with metals stocks tipped for a big turnaround after a mediocre performance last year. The Other Metals Index rose only 4 per cent, with the copper price hit by the Sumitomo scandal, while the All Ordinaries gained 20.4 per cent.

However, commodity prices are expected to improve, with an expected pick-up in global demand offsetting increased production as major new mines come on-stream.

Brokers say a restructured BHP will fare well, while WMC and Pasminco are other blue-chip miners tipped for good years.

Cyclical stocks such as building materials and retail companies are seen as offering good investment opportunities. Already there have been signs of improvement here, with the likes of Boral and CSR among the builders moving higher over the last quarter as expectations of a housing recovery rose.

Smaller building stocks catching the eye of Austock Brokers this year include Devines, Peter Kurts Properties and Walker Corporation.

The retail sector could also benefit from the softer interest rate environment. The director of Australian Equities at Rothschild Australia, Mr Gerard Eakin, says the turnaround at Coles Myer sets the supermarket and department store chain up for a good year. The other main player in supermarkets, Woolworths, also looks cheap at $4.29.

Despite his mild bias towards resources, Mr Eakin says there will still be good buying opportunities among the industrials. Qantas, for instance, like Woolies, is still relatively cheap and has good leverage in the market, he says.

Industrials that have had a rough ride recently can also be expected to rally, says Mr Eakin. The likes of Amcor, ANI and Pacific Dunlop have all undergone upheavals but look like settling down for a smoother ride.

In the media sector, the market has not looked kindly on the big-spending News Corporation and its stock has fallen 13.8 per cent over the year. Mr Eakin sees it as another cheap buying opportunity.

The best-performing sector over the past year was energy, which rose 62 per cent, driven by a spate of fruitful exploration ventures and the strengthening oil price. Companies such as Cultus, Woodside Petroleum and Oil Search soared.

One senior equities strategist for a large broker said oil stocks would again do well, although there was uncertainty about the price of crude. The market would continue to seek out those companies with good exploration prospects.

Another boom sector was banking, which jumped 51 per cent. But after impressive growth over the year, prices are now looking a little full, says Mr David Perry, head of research at Austock, although there may be an upsurge in corporate activity in the wake of the Wallis inquiry.

In contrast, the outlook for gold stocks is gloomy. It was by far the worst-performing sector over the past 12 months, falling 29 per cent as a central bank sell-off led to a squeeze on the bullion price.

What little positive sentiment remains about gold seems to lack conviction. The head of equities at BZW Australia, Mr Paul Macey, says the best that can be said about the sector is that it must be at or near the point of recovery.

Slightly more hopeful is Mr Eakin, who believes gold may offer some opportunities, if only because prices are so low. However, gold stocks are strictly for punting, he believes.

Overall growth on the All Ords will depend on several factors, but chief among them, say brokers, will be the impact of interest rates and the ability of companies to generate good earnings growth.

While the market's 20 per cent rise over the year was impressive, it substantially underperformed the United States, where the Dow Jones Industrial Average rose 34.2 per cent.

Mr Perry says this was largely because the earnings growth of Australian companies was inferior to US companies.

But there is quiet confidence that earnings growth will improve. The only concern, says Mr Macey, is that some companies are operating on earnings multiples of above 15 times, where they begin to look stretched.

"The Australian market is vulnerable only if earnings growth doesn't come through," says Mr Macey. "If it disappoints, I think you may see a correction, but if it is achieved, then the high multiples will be justified."

The full impact of the last four rate cuts is yet to be seen but there is typically a six to nine-month lag. Mr Perry says markets around the world are now far more sensitive to interest-rate movements than they have ever been. He calculates that a 1 per cent move on rates translates into a 7 per cent inverse movement on the All Industrials Index.

The US market will also have an underpinning influence on the local index and concerns mount about the direction and volatility of Wall Street.