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Mixed feelings about the future after tough 2002

 

INVESTORS are looking to a brighter 2003 after enduring 12 months most would prefer to forget. It was a year share markets around the world shed trillions of dollars and lost around 25 per cent of their value.

Those locked in to international growth superannuation funds watched as their investments were eaten away, while investors who stuck to the domestic market were spared somewhat, with shares values falling by just 4.8 per cent in the year, ending November 30, according to a report by research house InTech.

Sticking only to WA companies would have proven a good strategy, however. The Deloitte WA Index, which measures the stock exchange performance of WA’s companies, grew 18 per cent since its inception in May 2000 to the end of October this year. This compared with a 2 per cent decline in ASX All Ordinaries Index during the same period.

Choosing the right stock proved to be of paramount importance. The Trudo-WA Business News Total Shareholder Return Survey 2002, published in WA Business News on December 5, showed that only 44 per cent of WA stocks delivered positive returns over the past 12 months. And over the past five years less than a quarter of WA companies delivered positive returns to their shareholders.

With many investors eager to forget the past year, attention is now turning toward the next 12 months and the fortunes of the international markets and the effect on domestic activity.

Economists such as ANZ’s Melanie Hay expect housing construction to taper-off, while the drought and the weak world economy continue pushing at the edges.

In that environment economist are looking to business investment to provide the lifeline for the corporate world and the stock market – a lifeline that may indeed be thrown.

The latest Australian Bureau of Statistics figures show that business investment has increased nationally by 15.8 per cent over the past year. In WA, the June quarter figures show a 21 per cent jump in business investment and a 17.2 per cent increase for the past 12 months. The next year is expected to continue just as strongly, particularly if the development of the North West Shelf and the Burrup Peninsula proceeds as planned.

What’s more, while many companies have done it tough over the past 12 months, Ms Hay argued that the average balance sheet appeared to be in strong shape and able to withstand any further external pressure.

“Since the pain of the early 1990s the Australian corporate sector has repaired its balance sheet considerably and the debt to equity ratio has fallen [which is not to say that debt is a bad thing, merely that lower levels of debt increase operating flexibility],” she said.

“Not surprisingly the debt to servicing ratio remains at a low level, reflecting both the low level of debt and low interest rates at present.

“Therefore it appears fairly certain that the momentum in business investment which has built up to date, along with healthy balance sheets and widely accessible finance, will lead to strong growth in investment over 2002-03.”

Commenting on the latest round of ABS figures, including business investment and housing consumption growth, BankWest economist Alan Langford said business investment was hardly setting any records, but was growing at a rate fast enough to drag annual growth up to 13 per cent.

“This important component of the national accounts is, of course, at the top of the food chain of vulnerability to further deterioration in the global economy,” he said.

“Nevertheless, it is still realistic to expect business investment to take up a significant amount of the slack that will be left by the drought and the inevitable cyclical downturn in dwelling construction.

“Business investment has big shoes to fill if real GDP growth is going to come anywhere near last financial year’s growth of just a touch under 4 per cent.”

However, a D&B National Expectations Survey looking ahead to the first quarter of 2003 shows that drought and fears of

a US recession were registering high on CEOs’ concern list and

their subsequent investment expectations.

The survey found that 30 per cent of companies were cutting profit margins to maintain market share, while more than 50 per cent of those surveyed said they would expect to shed staff rather than hire new ones during the next three months.

Just 16 per cent of executives were expecting to increase capital investment spending. Furthermore, D&B found that any increase in the inflation rate would result in 58 per cent of executives reviewing their capital expenditure over the next 12 months, up from 41 per cent in April.

D&B CEO Christine Christian said the survey reiterated concerns of slowing growth in 2003.

“If the drought worsens and the world economy continues to stagnate, there could well be a small cut in interest rates,” she said.

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