Investment takes nerves of steel

The stock market these days is not recommended for those of a nervous disposition. Even if you avoid stepping on land mines like ERG or Anaconda Nickel, the shares of many companies are being pummeled if the quality of their earning falls short.

Brokers now fancy themselves as forensic accountants and spend much time probing for the hole in the doughnut. That is a welcome development. We are beginning to see a market for stocks, rather than an undiscriminating stock market.

The All Ordinaries Index is trading just 2 per cent below its peak of 3,452 touched on June 28 last year.

That was a day when shares were being blatantly manipulated by traders engaged in a futures ramp. Too much is made of the index anyway. Its heavy weighting to News Corp and Telstra means daily movements often depend on which side Rupert Murdoch got out of bed, or how stroppy Allan Fels is feeling.

Commentators are jittery because Australia has outstripped virtually every other major stock market. That could have had something to do with the fact that our GDP has been growing at around 3.4 per cent, while the rest of the world went to the dogs.

Now we learn that business investment is slated to rise a best-ever 21 per cent next financial year. That projected $40 billion spending spree would keep the party going when housing and exports lose impetus.

But the market reaction has been muted. Profit takers have moved in. Some fund mangers are saying the wheeze is to switch more money out of here into bastions of stability like Hong Kong, Thailand and South Korea, which are more highly geared to the coming rebound in the US economy. Good luck.

Last week brought pleasing news from companies just down the road. Few would have tipped BankWest shares to hit a record $4.67 without news that its parent Halifax-Bank of Scotland had flushed out a buyer for the concern.

Instead, it was an annualized 23.5 per cent jump in profits that did the trick. BankWest says 42 per cent of its loan book is now written interstate, and the future is set fair. If St George Bank of Sydney still wants to get into bed with the Perth bank, it will have to up the ante.

Salomon Smith Barney has produced a bumper 27-page research report on Bristile.

Its analysts put an “outperform” sticker on the purveyor of bricks and tiles, even though the share price has doubled in a year to $2.95.

They say the biggest problem CEO David Gilham has is a surfeit of money. Bristile is virtually debt-free, and throws off dollops of cash, thanks to increased margins and good management. Possible uses for the cash include higher dividends – the prospective yield is already over 5 per cent.

There could be another acquisition to complement the purchase of Pioneer’s southern building products division.

The Brickworks group, which owns 19.8 per cent of the company, is allowed under the takeover regulations to “creep” up by 3 per cent every six months. Alternatively, it could bid for the lot. Salomon’s values the whole show at $3.40.

Another local company being lauded is Iluka Resources, whose shares have scarcely stopped going up since long-serving boss Malcolm Macpherson walked the plank last year.

Iluka seems to be doing well

without a managing director – although it has put out help-wanted-ads for a replacement. Iluka has flagged greater disclosure of its reserves of titanium, zircon and other goodies, which are a direct play on global recovery. Merill Lynch rates the stock a strong buy at $4.80, and UBS Warburg warbles Iluka is a high-quality investment grade outfit.

The overall stock market needs to take a breather, while profits catch up with the ritzy 18 times price/earnings ratios.

Recently, Australia has been all but ignoring big movements on Wall Street.

Economists have been squawking about higher interest rates on the horizon, following the bounce in January retail spending.

House buyers should take care, but dearer money is the corollary of stronger business conditions. Get set for them.