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Emerging economies the big winners

THE year to date has been a tough one. The shakeout in technology stocks and weaker global economic growth has created a difficult environment for world sharemarkets.

Craig James at Commonwealth Securities has monitored 71 of the world’s sharemarkets. Only 25 of them are now at higher levels than they were at the start of 2001.

Emerging economies have been the big winners. China, with its growth of 147.5 per cent, Zimbabwe (+108.8 per cent) and Russia (72.1 per cent) really did dominate the league table. Interestingly, Australia is one of the few sharemarkets in the developed world that has posted gains so far this year. However, Mr James is not predicting any continued out-performance by Australia. He expects Australia will range-trade in the next three months between 3250-3400 until greater certainty besets itself on the global economy.

The sharemarkets to register the biggest falls were Finland (-35.9 per cent), Cyprus (-28.3 per cent) and Poland (28.2 per cent).

So far this year we have had a rise of 6.4 per cent. That ranks us 21st in terms of gains recorded so far in 2001. There is a paucity of major global equity markets in the winners’ circle this year.

Two Asian sharemarkets have recorded solid growth during 2001 – South Korea (18.5 per cent) and Thailand (18.4 per cent).

A look at the performance of the major equity markets is a tale of woe. France (-12.5 per cent), United Kingdom (-9 per cent), Germany (-8.3 per cent), Japan (-6.5 per cent) and the US (-2.6 per cent) are hardly delivering the returns that investors would have been expecting or hoping for.

Australia’s out-performance has been all the more meritorious given that we are still essentially a commodity-based economy and, in a declining world environment, we have managed to deliver this performance. Some of the major equity markets have recorded declines of 10 per cent and more in the past six months and declines of up to 15 per cent for the whole of the financial year.

Yet Australia has managed a rise of 6.4 per cent in the past six months and 3 per cent over the past year. The All Ordinaries Index is now only 0.5 per cent below the all-time closing record and 0.8 per cent away from the intra day record of 3378.7.

Mr James identifies a number of factors that have led to the out-performance by the Australian market. These are such things as the diversity of investment opportunities, the low Australian dollar and solid fundamentals of corporate Australia.

The Australian sharemarket did not reach the lofty heights of other global sharemarkets in the tech boom and, as a consequence, has not suffered the re-rating of the valuation of our companies. When the tech boom was occurring around the world, we were largely insulated, as we were considered an “old” economy. Now we are being recognised as a land of very diversified investment opportunities.

While tech companies are represented on the Australian market, so are resource companies, industrial companies and service companies. Another factor that has worked to our advantage in Australia has been the low Australian dollar. Our resource companies have been attractive opportunities for foreign investors. Additionally, our limited domestic market has led to a number of our companies looking to foreign markets for their opportunities.

The performance of the Australian sharemarket has come about at a time when the Australian economy is slowing.

We have seen a number of profit downgrades, such as that announced by Coles Myer in recent days. While Mr James is predicting that corporate Australia will report sharply weaker profit growth for the past year, this is coming from a high base.

The Commonwealth Securities “mums and dads” index of commonly-held stocks is indicating that investors have retained faith with Aussie shares and are confident the economic slowdown is a temporary situation, and that corporate Australia has the ability to weather the more difficult times that may be around the corner.

In a nutshell, Mr James and his cohorts at the Commonwealth Securities Research team are suggesting: “The uncertainty of the global economic environment is serving to restrain the Australian sharemarket.

Effectively it is difficult for the Australian market to push further into record territory on the basis of relative global valuations. We expect the Australian dollar to continue to range-trade in the next three months as the global situation becomes clearer. The brighter picture for the domestic economy, continued softness of the Australian dollar and the solid fundamentals of Corporate Australia are regarded as principal supports for the Australian sharemarkets.”

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