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HSBC and RBA share outlook

RESIDENTIAL property has delivered very pleasing returns for investors over the past few years, in stark contrast to the dismal returns from shares.

But the continued run-up in property values has left investors and analysts wondering how long the boom can last.

The Reserve Bank certainly believes the property market is due for a correction. Deputy governor Glenn Stevens spoke of the “recent fervour for residential property” in a speech earlier this month.

HSBC strategist John Banos is also wary, describing the residential property market as “showing symptoms of a bubble”.

“The fundamentals are deteriorating because vacancies are high by historic standards and rentals are falling. And yet investors are prepared to pay higher prices and take on more risk for less return,” Mr Banos said.

It is widely accepted that the areas of greatest concern are inner city apartment markets in Melbourne and Sydney.

The run-up in Perth property prices has been modest com-pared with most other State capitals, but similar pressures are still apparent.

Against this backdrop, Mr Banos has analysed the outlook for investors.

He believes equities are “significantly more attractive than residential property”, with rising company earnings and attractive valuations being the positive drivers.

Company earnings are forecast to increase by about 5 per cent in 2002-03, based on continued strong economic growth of 3.7 per cent.

Valuations of ASX-listed companies are considered attractive, based on the 16 per cent fall in the All Ordinaries Index from its peak of 3,440.

On this basis: “Australian shares appear significantly undervalued relative to other asset classes, including bonds and residential property,” Mr Banos said.

Domestic liquidity is also regarded as favourable, based on low interest rates and the in-crease in the compulsory superannuation guarantee from 8 per cent to 9 per cent in July this year.

This will automatically increase the amount of money flowing to fund managers.

However, Mr Banos notes that when the world economy does recover, it may lead to less global money flowing into “safe havens”, such as Australia.

The main negatives for Australian shares include monetary conditions, with HSBC forecasting interest rates to rise by 0.75 percentage points between now and June 2003.

Other negatives are inter-national in nature, and include possible war against Iraq, continued recession in Japan, and the threat of recession in the US.

The Reserve Bank’s Glenn Stevens also believes that “we are still in a period of great uncertainty”.

However, he concurs with the majority view that the world economy “will gradually work off the excesses of the boom and that we will in due course experience better conditions than we see just now”.

In other words, the world economy will record modest economic recovery but will not enjoy strong growth for the foreseeable future.

The bottom line for HSBC is a positive outlook for Australian shares.

Indeed Mr Banos is forecasting the All Ords index to reach 2,900 by June next year, an increase of 20 per cent above its current level.

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