Smart Money
Sydney Morning Herald
Wednesday August 28, 2002
Which part of the market is offering winning investment opportunities? Barbara Drury reports.
Share investors who stayed for the ride this year must feel like bodysurfers dumped by a breaker on a coral reef.
Needless to say, they're not keen to get back into the water until it settles. But, as Australian shares edge closer to levels considered fair value by analysts, investors can prepare themselves by reviewing market sectors for those industries expecting growth.
That said, given the lack of consensus about the market's direction, there is debate about the most attractive sectors.
Tim Rocks, a Macquarie Equities strategist, is an Aussie shares optimist: ``We still see the market as undervalued given the sharp falls in market interest rates for 10-year bonds. I see 5 to 10 per cent upside in the Australian market in the short term and perhaps more than that for the US market."
Gavin Duffy, strategist at CommSec, is not so sure about the market being undervalued. He points out that it is still only 10 per cent short of its all-time high, but adds it is important to note that the structure of the market has changed dramatically since the collapse of technology, telecommunications and media stocks.
Credit Suisse First Boston strategist Hugh Dougherty is even less convinced. ``I don't think the market has necessarily bottomed. Valuations have improved dramatically since March, but they still have a way to go.
``We're still recommending high cash levels and looking for more convincing signs that valuations are at a stable point. The ASX 200 needs to be below 3000 to be in value territory," he says.
CSFB continues to recommend non-financial industrial stocks in defensive sectors such as utilities, energy, gaming and retailing. Dougherty singles out Aristocrat Leisure, Orica, Tabcorp and Woolworths.
In the resources sector, Dougherty reckons gold stocks remain attractive. He likes BHP, among the majors, because it has more exposure to oil than Rio Tinto. ``We're pretty worried about the valuation of banks they're too expensive compared to other areas [of the market]," he says.
Duffy disagrees: ``What has supported our market is the rise and rise and rise of the banks. In a low-interest-rate environment, with government support for first-home buyers, an increase in infrastructure spending and GDP growth headed for 3.5 to 4 per cent, the banks are still well positioned to enjoy growth."
Duffy argues that the banks have assumed a privileged role in the economy now that people are paid directly into their bank account and the bank earns a fee every time they transfer or withdraw funds.
``I don't see anything threatening that in the next two to three years. I think they are undervalued in the market," he says.
He also reckons that resource stocks are poised for renewed growth, especially when the United States and European economies pick up, given that global consolidation has left these sectors with a dominant position. BHP and Rio Tinto are trading on prospective price-earnings multiples of 13 to 14 compared with prospective multiples of 25 to 30 in previous booms, he says.
Duffy argues that some companies in the retail sector are undervalued for similar reasons. After 20 years of takeover activity, he says, companies such as German supermarket chain Aldi may come in and take 5 per cent of the market, but it is difficult for them to threaten the dominance of Coles Myer or Woolworths.
He says Woolworths, Foodland Associated, Metcash Trading and Coles Myer have all reduced operating costs and made strategic investments in higher-margin businesses such as liquor retailing.
Macquarie's Rocks believes it is time to reassess the reviled insurance sector.
After the convergence of events such as September 11, HIH, bushfires and crises in medical and public liability and builders' warranty there is finally some light at the end of the tunnel, he says.
``Insurance stocks performed poorly on general market weakness because so much of their earnings depend on investment income. If you believe the volatility has eased and things are now more stable, people will begin to see through the investment income to the underlying business which is looking strong," he says.
Rocks says rising premium income augurs well for profits during the coming years. He picks general insurers IAG (which reported a $25 million loss last week due to investment losses that obscured its first underwriting profit) and Suncorp-Metway as likely high achievers.
Broadly speaking, Rocks expects to see a recovery in those stocks that were the most heavily battered during the past year. ``Not sectors so much, with the exception of health care."
When the bears were on the prowl, he says, they targeted all stocks on high price-earnings ratios. ``When some of those stocks had bad news, it all added up to fear," he says, citing the healthcare sector as particularly hard hit.
He sees some upside in healthcare stocks such as ResMed and CSL.
Rocks also believes that continued strong spending on construction and infrastructure will benefit materials providers and developers. He points to OneSteel as the standout stock.
© 2002 Sydney Morning Herald
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