Storm over, but it's still heavy going
Sydney Morning Herald
Saturday March 12, 2011
The road to stronger returns is caught in policy headwinds, writes John Collett. It is two years since Australian share prices hit the bottom following the financial crisis. The market sprung into life briefly for the first six months after the low point, and then traded a little higher to almost hit 5000 points in mid-April last year. But for the past year, the S&P/ASX 200 Index has been going nowhere, trading in a range of 4500 and 4900.It's still down about 30 per cent from its peak on November 1, 2007, of just more than 6800 points. As Australia's share prices struggle for momentum, during the past 18 months German and American shares are up about 30 per cent and British shares have rallied by more than 20 per cent as strong growth in corporate earnings returns.The recently concluded Australian profit-reporting season underlined the extent of the gap between industry sectors and their ability to grow company earnings. The big miners and the companies that service them are doing well, as commodity prices stay strong and the big banks succeed. Even small miners, yet to turn a profit, have surging share prices.But industries such as retailing, manufacturing, tourism, construction and agriculture are struggling. Relatively high interest rates, the high Australian dollar and more cautious consumers have seen earnings downgrades for many companies in these sectors.Shareholders will have to remain patient before experiencing the returns that shareholders are enjoying from US-listed shares, says the head of investment market research at Perpetual, Matthew Sherwood. The balance of risks has swung in favour of advanced-country markets, he says. "Australia's economy has more policy headwinds than virtually any other economy," Sherwood says.The Aussie dollar is up 70 per cent against the US dollar since the trough of the GFC and the Reserve Bank has increased the cash rate by 1.75 percentage points. After allowing for the banks' margins, mortgage rates have risen about 2 percentage points. Interest rates have increased by more than any other economy and about three times the global average, he says.An economist at CommSec, Savanth Sebastian, says while mining and energy companies will continue to benefit from industrialising economies' need for commodities, domestic-focused companies are facing more challenging conditions. Consumers are more inclined to put their money in the bank than spend it or put it to work in the property or sharemarket, he says.An investment strategist at MLC Investment Management, Michael Karagianis, says investors are wary of putting their money into the sharemarket. The Australian sharemarket was "one of the more overvalued" markets when the GFC hit and a lot of sharemarket investors "got very hurt", he says.The Australian Securities and Investments Commission estimates that high-profile collapses - such as ABC Learning, Babcock & Brown and others between 2007 and mid-2009 - cost investors slightly more as a proportion of GDP than was lost in major collapses during the turmoil of the late 1980s."I am concerned that the prognosis for a significant proportion of the Australian industrial sector is going to be modest unless the Aussie dollar weakens a little or interest rates fall," Karagianis says.He is not bearish on the market, however. The Aussie dollar is overvalued and is "more likely to fall than rise", Karagianis says.The Australian sharemarket could produce a total return (share prices plus dividends) over the medium-term of 8 per cent a year. That's more than could be earned on bonds and cash but would likely be less than could be earned on global sharemarkets, Karagianis says.Perpetual's Sherwood is expecting shares to do better in the second half of this year. By then, the reconstruction boom from the floods will be in full swing and economic growth will pick up. A big driver of growth is mining investment and he does not expect that to pick up until 2012.Dividends are likely to play a more important role in returns in a market where share prices are going sideways, says the chief executive of Lincoln Indicators, Elio D'Amato. "Investors who are happy to take a passive approach to investing in shares can get some comfort by investing in the bigger companies," he says.But for those prepared to be a bit more active, there are some smaller companies with good financial health expected to grow their revenues and profits strongly.Among the bigger companies, he favours the established miners, mining services companies and the banks.But he also thinks some smaller information technology companies may do well. As companies are expecting little revenue growth, they are focusing on cost-cutting and the best way for them to do that is to spend on IT, D'Amato says.Although economists are expecting the market to pick up in the second half of the year, investors may find they can buy quality shares at cheaper prices now, he says.A mixed bag for mum and dad investors:Shares held by ‚ś‚śmums and dads‚„‚„ have not done aswell as the market overall during the past two years.While the S&P/ASX 200 Index has returned about 52 per cent over the two years, CommSec‚„sMumsand Dads Index has returned 42 per cent.The CommSec index is an equalweighting of the nine stocks with the largest number of small shareholders. It includesAMP, CBA, Suncorp, Tabcorp Holdings, Telstra, Wesfarmers,Woolworths, Insurance Australia Group andQantas. Many of these stocks came into existence after the privatisations, demutualisations and sharemarket floats that occurredmostly in the 1990s and many have been passive investors happy to leave their shares in the bottomdrawer.The main reason for the underperformance of theMumsand Dads Index is that it does not holdBHPBilliton or RioTinto or any other mining or energy stocks, which have been strong performers over the past two years, says CommSec chief economist, CraigJames.Telstra is the biggest detractor fromthe performance of theMumsand Dads Index, with the telco losing 14 per cent over the past two years.The best performer over the past two years has beenWesfarmers, with a share price rise of 93 per cent, followed closely by the Commonwealth Bank, with a share price rise of 92 per cent. Despite the quality of the companies in the Mumsand Dads Index, it includes few companies that have much exposure to Asia
© 2011 Sydney Morning Herald