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Interest rates to stay on the agenda

THE current economic conditions of rising inflation, increased job advertisements and Reserve Bank meetings are all keeping interest rates firmly on the agenda. The recent announcement of a headline inflation rate of 3.1 per cent, after an increase of 0.9 per cent in the December quarter consumer price index, has kept all pundits guessing.

The conundrum facing investors now is the prospect of a return to a higher inflation period and, as a consequence, higher interest rates. Or was the December quarter an aberration? The jury for the short term is unanimous, with no-one expecting a short-term up-trend in rates. The longer term, however, is more difficult to predict.

In recent times, central bank efforts to keep inflation within explicit targets, in addition to increased productivity and competitive pressures brought on via free-market forces and globalisation, have helped keep a lid on inflation. In the US, the Federal Reserve slashed rates from 6.5 per cent to a 40-year low of 1.75 per cent.

In Australia, most economists believe we are right at the bottom of the cycle, with the RBA expected to hold rates steady at 4.25 per cent until about September, when it is expected that strengthening world growth will force rates higher.

For investors this is important, with historical data showing that the end of easing cycles have traditionally been good for equity markets.

The current period is considered a “sweet spot” in the investment cycle, with signals of an economic recovery and an improving outlook for earnings. Equities are a good option for investors over the next six months, with the world economy expected to pull out of recession.

AlintaGas

AlintaGas reported a 22.2 per cent rise in net profit for the six months to December 2001 of $32 million. The result was driven by a strong focus on reducing operating costs, lower corporate tax rates, lower interest rates and higher LPG export volumes.

As a result, AlintaGas has moved from a low of $3.51 to a high of $3.88 this week, with further upside expected. The company chief executive, Bob Browning, expects earnings growth will be sustained in the short term.

It is hard to fault management on the returns driven out of the business since the float in October 2000. The group remains well positioned to deliver on its growth targets for the 2002 financial year, largely underpinned by its LPG plant expansion. It is expected that AlintaGas will benefit from market upgrades in the short term.

The major shareholder is committed to holding until October 2002, subject to conditions of the IPO. After that time the gas market will be openly de-regulated, which will present both opportunities and threats. The major shareholder is WA Gas Holdings (50 per cent Utilicorp/50 per cent United Energy), and there is much speculation of a takeover possibility from this shareholder.

A dividend of 11 cents per share has been declared, which is fully franked, with the payout expected to be increased in the future. The ex-dividend date is February 27.

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