Market fired up
China to underpin activity in new year
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