Optimism despite ‘Enronitis’

THE end to the financial year is a prime time to take stock of the Australian share market – the star performers, the under-performers, and the likely hangover into 2003.

DJ Carmichael, in its yearly wrap-up, said listed property trusts, banks, chemical and transport industries were also viewed favourably by investors.

The stockbroker said the market’s performance could be broken down into three parts. The first three months were categorised by a downward drift over increasing concerns over the state of the economy and the hangover, ending with a slump in the wake of the September 11 terrorist attacks. During the following six months there was a recovery as bargain hunters moved in, stimulated by low interest rates and government spending.

“Since March the market has fallen as the outlook for agricultural, metal and bulk commodity prices weakened and ‘Enronitis’ hijacked confidence in corporate accountability,” the broker says in its latest report.

Despite the sell-down in Australian stocks, induced by frantic profit re-writing in the US, DJ Carmichael remains optimistic about the financial year 2003 outlook.

“There is little doubt that global economic activity will improve from its current depressed levels; the question is when,” the broker says.

“We believe growth will not be strong next year so investors will need to be guided by careful stock selection.

“Despite recent market weakness, the US market still values numerous companies on historically high price-to-earnings multiples.

“Australian valuations are not as extended as those in the US but still trade at historically high levels.

“Solid earnings growth in financial year 2003 with little overall price movement would see price-to-earnings ratios back toward 16 times by year’s end.

“Interest rate rises, weak housing demand and a subdued share market is likely to have a negative impact on disposable income moving forward.

“It is difficult to move past basic food retailers such as Woolworths and Foodland Associated,” DJ Carmichael says.

“Performance amongst discretionary retailers will be mixed. Coles Myer and David Jones are likely to under perform, with heavy discounting by the former negatively impacting the latter.

The telecommunications and technology sector is also likely to languish with WorldCom’s woes likely to weigh on the sector.

“Telstra will be keenly watched, yet remains trapped in a solid downtrend.

“Barring a breakup of its network infrastructure business, we see Telstra shaping up more and more as a utility, where yields of 6 per cent would not surprise, implying a price target of below $4.”

A report earlier this week by SG Warrant analyst Moghseen Jadwat advises investors to remain clear of the insurance sector, which has not yet recovered from the September 11 domino effect.

“The insurance industry, along with AMP, is a broad sector that we have been extremely bearish on for a long time, instead advising investors to switch to the banking sector,” Mr Jadwat said.

“We have struggled to understand why an investor would maintain exposure to any insurance company.

“Even the likes of QBE Insurance, which is amongst the wider market’s favourite stocks, has suffered on concerns of both terrorism and poor investment returns.

“We still remain negative on QBE with targets to 45.75 as a minimum.

“The latter factor of poor investment earnings has been plaguing the likes of AMP, sending it to its lowest level in almost two years.

“Given the poor performances of equity markets, there are risks that investments earnings, not only for AMP, but for other managers and insurers will be below expectations.”

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