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ASX heading for a big finish

Well, there goes the neighbourhood. The bull market which saw share prices hit a record peak in November is struggling. However, despite the attack of the shivers, Australia is still likely to be one of the few bourses in the world to finish the year higher than it began.

Some recent performances have been stunning. Analysts who have been lukewarm on Wesfarmers had to crane their necks to follow the vapour trail of the shares as they shot through $17.70 last week. Wesfarmers has climbed from a low of $11.40 in May. Now the conglomerate is valued at $4.5 billion and pressing to become one of the 30 biggest companies in Australia.

AlintaGas provided a warm introduction to the market for many first time investors with the shares bubbling up from the $2.25 retail price in the float to touch $3.27. Further afield, the 1.1 million shareholders in AMP have seen the rehabilitation of the insurance giant since the GIO debacle carry its shares up from $13.50 to a respectable $19.70. These moves have not been captured in the S&P ASX200 index, against which many institutions benchmark their performance. Rupert Murdoch’s News Corp has been in free fall for months, and accident-prone Telstra was a dog. Together these two account for nearly one fifth of the index. Without them, the likely gain of 3 per cent or so for 2000 would have been more.

When capital gains tax was effectively halved in July, many commentators advocated avoiding shares in “value” companies paying steady dividends in favour of “growth” companies on high price/earnings ratios. The argument was based on the fact that income would be taxed higher than market winnings. The advice turned out to be largely wrong. All the average investors had to do to make money was buy shares in any of the big four banks, and avoid the hand grenades rolling around in the technology sector.

But clearly 2001 is going to be a tough call. Profits are already under pressure.

There is some good news. Not six months ago, the big worry was that the $12 billion personal tax cuts feeding into a booming economy would drive consumers mad with lust. Combined with the dreaded GST, it was feared that inflation would rocket and interest rates would be driven up. You can forget about that. The yield on 10-year bonds has tumbled to a 20-month low of 5.47 per cent from over 7 per cent earlier in the year. Bond traders are wrong nearly as often as they are right, but the clear signal is that skinny fixed interest rates will be supportive for equities in the coming months. Inflation will be under control as the domestic economy continues to cool. The price of oil has fallen 20 per cent in recent weeks to $28 a barrel. The Australian dollar jumped 8 per cent when nobody was looking, and it is building a base above US54¢. There are now no good reasons to sell the aussie.

RBA chief Ian Macfarlane will soon be able to clip domestic interest rates. He will not have to wait long for the Federal Reserve to move. Unless Alan Greenspan wants to finish his illustrious career by being tarred and feathered, he will not repeat his only mistake made 10 years ago, when he kept the brakes on too long and tipped the US into its 1990 recession.

The Australian domestic economy is obviously slowing. But growth could be 3.5 per cent next year, provided exporters continue their stellar run. The commentators who jeered at Australia for not having an IT manufacturing industry are now looking a bit silly. We are selling goods the world wants, while countries around the region are still trying to unload chips with everything to US computer companies that are taking a bath.

The mining sector collectively earned $1.2 billion in1999/2000, the best result for five years. It should have been more. Overseas investors often pick up resource shares in January, when many Australian brokers are vacationing on the beach. This year they might be buying whole companies and replacing poor management.

Merrill Lynch Australia has just released a research report sub-titled “the revenge of the old economy.” Its analysts favour companies with strong cash flow and market leading positions. That sounds a lot like the big four banks, which have been beaten like a gong in recent trading sessions. The Merrill men see the banks delivering 15 per cent earnings growth for the next two years. The report was written before the Wall Street willies spooked our market, and its 12-month target of $40 for CBA shares looks a bit punchy.

When the bears are out, everybody risks a mauling.

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