Mar­ket fired up

China to un­der­pin ac­tiv­ity in new year

Townsville Bulletin - - Weekend Extra / Business -

THE con­tin­u­ing China-fu­elled re­sources boom and fre­netic merger ac­tiv­ity was be­hind an­other bumper year for the Aus­tralian share­mar­ket, which is tipped to keep fir­ing in 2007.

But af­ter four straight years of sky-high re­turns, share­holder prof­its are ex­pected to come down to long term av­er­ages, and many in­vest­ment pro­fes­sion­als will be look­ing off­shore for bet­ter value.

There’s also some edgi­ness about the amount of debt be­ing poured into lo­cal private eq­uity deals, but ex­perts are di­vided on whether in­vestors should be alarmed, or just alert.

The mere pos­si­bil­ity of such deals and the fat pre­mi­ums they promised helped push the Aus­tralian Stock Ex­change’s bench­mark S&P/ASX200 in­dex up by 19 per cent in 2006.

The in­dex closed at a record high of 5669.9, af­ter climb­ing 906.5 points over the year, from 4763.4 at the end of 2005.

The all or­di­nar­ies in­dex fin­ished at 5644.3, also a record, and was up 19.9 per cent or 935.5 points over the year from 4708.8.

The year’s best per­form­ers were again lo­cal re­source com­pa­nies, which con­tin­ued to feed a Chi­nese econ­omy ex­pected to have grown by an es­ti­mated 10.4 per cent this cal­en­dar year.

Takeover ac­tiv­ity or takeover spec­u­la­tion also helped put a rocket un­der the likes of Qan­tas Air­ways, Coles, Fos­ter’s Group, PMP, DCA Group , QBE In­sur­ance Group, Smor­gon Steel and many more.

Mean­while, the ex­pected re­lax­ation of cross me­dia own­er­ship rules next year trig­gered Fair­fax’s planned friendly merger with Rural Press and paved the way for private eq­uity firms to buy chunks of Pub­lish­ing and Broad­cast­ing and Seven Net­work.

All this cor­po­rate ac­tiv­ity came against a back­drop of low un­em­ploy­ment and con­tin­u­ing global eco­nomic strength — al­though the Chi­nese, United States and Aus­tralian economies slowed in the sec­ond half. AMP Cap­i­tal In­vestors chief econ­o­mist Shane Oliver says the S&P/ASX200 in­dex can pass the 6000 point in 2007, to be at about 6100 points by the end of 2007, rep­re­sent­ing 10 per cent cap­i­tal growth or 14 per cent with div­i­dends.

‘‘There’s a bit of un­cer­tainty so we should al­low for a cor­rec­tion as global economies slow,’’ Dr Oliver said.

‘‘That will take pres­sure off in­ter­est rates but (economies) won’t slow enough to crunch cor­po­rate prof­its.’’

Com­msec an­a­lyst Craig James thinks the in­dex will reach 6150, and post re­turns of 13 to 15 per cent.

Bou­tique fund man­ager Prime Value man­ag­ing di­rec­tor Hung Lee says de­mand from China will keep the Aus­tralian share mar­ket tick­ing along in 2007 — but not at the same rate as this year.

‘‘We have had a dream run, and the rate of re­turn is some­what un­sus­tain­able,’’ Mr Lee said.

The World Bank has pre­dicted the Chi­nese econ­omy to slow down a bit but still re­main rel­a­tively strong next year, with growth of 9.6 per cent.

Dr Oliver says com­mod­ity prices will prob­a­bly wane, but then reach record highs in the sec­ond half of next year.

To be on the safe side, Mr Lee rec­om­mends in­vestors go over­weight in big min­ers that can in­crease their pro­duc­tion ca­pac­ity, like BHP Bil­li­ton and Rio Tinto, rather than risk smaller com­pa­nies in the sec­tor that rely too much on com­mod­ity prices go­ing up.

Mr Lee also likes the banks to pro­vide a de­fen­sive bal­ance and stocks that sup­ply re­source com­pa­nies with equip­ment and ser­vices.

FULL STEAM AHEAD . . . the Aus­tralian stock­mar­ket is tipped to keep fir­ing in 2007 af­ter a

suc­cess­ful year in 2006 was un­der­pinned by the Chi­nese re­sources boom

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