Wild ride in sharemarket not over yet

Miriam Steffens
Sydney Morning Herald
June 30, 2008

AUSTRALIAN sharemarket investors should brace for more pain to come as they are finishing off their worst financial year in 26 years today, fund managers and economists have warned.

"I'm fearful there could be further declines ahead," Rob Henderson, the chief economist at NAB Capital, said yesterday.

With the economy slowing down rapidly and the US either in recession or very close to it, "there is lots of bad earnings ahead and the high oil price is definitely having an impact right around the world", Mr Henderson said.

The sober outlook comes as the benchmark S&P/ASX 200 index is heading for its first fall after five years of double-digit gains, heading for a loss of more than 16 per cent in the 2007-08 financial year.

The market is poised to deliver its worst performance since 1981-82, topping the year off with the worst June in half a century, amid mounting concern a near doubling in oil prices, higher interest rates and a global economic slowdown will eat into company profits and dividends.

A series of corporate blow-ups like Centro Properties Group, Allco Finance and ABC Learning Centres has aggravated the crisis in market confidence, wiping out billions of dollars in shareholders' funds and leaving investors wondering about the integrity of company reporting and the effectiveness of market regulators.

"It has been the perfect storm," said Winston Sammut, from Maxim Asset Management. And conditions are expected to get worse before they recover.

Mr Sammut sees "more pain to come through over the next quarter", with further declines of up to 10 per cent as investors come to terms with disappointing annual company results and profit outlooks.

The chances for a recovery over the next months were slim, said Daniel Mueller, a fund manager at Cannae Capital Partners, who predicts a "weaker reporting season than we have seen in the past, which in turn will fuel even more pessimism".

The sharemarket slump would have been even more severe were it not for the resources and energy stocks like Rio Tinto and BHP Billiton, which have been boosted by China's buoyant demand for materials like coal and iron ore.

The energy sector rose almost 35 per cent over the past year, while consumer, industrial and financial stocks have lost more than a third in market value.

The share price of Fortescue Metals, which has yet to report a profit, more than tripled in last year's bear market, making it the best-performing stock on the ASX 200 and turning its founder, Andrew Forrest, into Australia's richest man ahead of James Packer and Westfield Group's Frank Lowy.

And the two-speed market is likely to continue into the new financial year, with resources stocks remaining in favour with investors. Profits across the industry should rise by 60 per cent to 70 per cent in 2008-09 amid rising commodity prices, AMP Capital's chief economist, Shane Oliver, predicts.

Agricultural stocks were also tipped to do well, as were large cash-flow companies and consumer staples such as Telstra and Woolworths, strategists said.

Yet for banks and industrial stocks, which make up the rest of the market, opinions are divided.

Asked about their investment strategy, some fund managers said they would start looking again at financials, saying they had become cheap after concerns about the US subprime mortgage crisis pushed the sector down 34 per cent over the past year. Others warned of further write-downs and slowing profit growth as higher interest rates deter clients from borrowing.

Braver bargain hunters may also come back to stocks like the former market darling David Jones, or TV broadcaster Ten Network, which have almost halved in price over the past year and are now - along with other consumer discretionaries - trading at the lowest price-earnings levels in a decade.

But experts warned that may be premature. "We don't yet know the full extent of the deterioration that is in store," said Tony Brennan, a strategist at Deutsche Bank. If the economy was heading into recession, the stocks "may not prove as cheaply as they look".

Not everyone shares the pessimistic outlook. While investor nerves would keep markets volatile, "these are bargain basement prices and we will look back in five years' time and think 'if only we got in'," said Hans Kunnen, Colonial First State's chief equities analyst.

"We have a resources boom, we've got tax cuts, corporate Australia has got good balance sheets and as a nation we're [well] positioned. People have priced in recession and I think they are overdoing it."

Risk-averse investors may prefer hard cash to betting on a share rebound: with online cash accounts offering returns of up to 8.25 per cent, it may be the safer option.

This story was found at: http://business.smh.com.au/wild-ride-in-sharemarket-not-over-yet-20080629-2yun.html