Rates make for interesting times

THERE is a Spanish curse “may you live among interesting times”. Some investors must feel they have upset a Spaniard. Tumbling interest rates over the past year have been great news for homebuyers and business borrowers, but the flip side for retirees and savers was shrinking returns from bank deposits and cash management trusts.

Many responded by pumping money into shares. More than a billion dollars a month flowed into retail managed funds in Australia, lifting the total to $234 billion. That should have worked out okay. The S&P ASX 200 index was up 10.4 per cent last year. Add on dividends, which are generous by international standards, and the news should be rosy.

Unfortunately, professional players kicked more points than goals, with most of the damage done overseas.

Fund managers who look after the $540 billion held in superannuation for 10 million workers achieved median returns of a wimpish 3.8 per cent in 2001.

The most successful money manager, Maple-Brown Abbott, had only 10 per cent of its assets in international shares, versus 25 per cent or more held by those who were badly punished.

Given that most funds have 40 per cent or so in Australian shares, some managers also must have made poor calls. Hands up those chasing index weightings who paid the wrong price for News Corp?

Economic commentators who were baying for a recession only six months ago are now telling us to pencil in 4 per cent GDP growth by the middle of 2002.

The buzzword again is “cyclicals”. The consensus is to sell those boring old banks and property trusts and load up with paper and packaging stocks, media and retail shares, and resource companies.

In a refreshing research note, Hartley Poynton reminds us that “the consensus is almost never right”. The brokers still like the big banks, believing they are set to deliver 12 per cent earnings growth, outstripping the broad market.

If the US is headed for a Superman-style recovery, it might bring its own problems. Alan Greenspan may clip interest rates by 25 basis points to 1.5 per cent at the end of this month, and the RBA could conceivably follow suit, down to 4 per cent. But that would be your lot. This is the bottom of the interest rate cycle. Mortgage rates may not reach today’s levels again for many years. Borrowing costs are not going to get any cheaper. The Australian stock market is within a whisker of its all-time high, and competing bond yields are edging up.

There is no reason to sell good shares – but watch out for that Spaniard.

Little fallout from a bit of Argie bargie

THE bankruptcy of Argentina and the devaluation of its currency does not appear to present any real threat to our rural sector. The most vulnerable are exporters of wheat and oilseeds, who will be faced with rival production theoretically up to 40 per cent cheaper. WA lupins compete directly with Argentinean soyabeans as stockfeed.

But that is only half the story. The South American country is in the knacker’s yard. Almost half the 36 million people exist below the poverty line and unemployment is north of 18 per cent. The economy has been incinerated, hyperinflation may be on the way back, and farmers cannot get enough cash out of the bank to pay for fuel.

Cattle baron Peter Holmes a Court was in town last week. Briefcase asked him how the pulverised peso might affect his Australian Agricultural Co. He pointed out that Argentina beef is a foot-and-mouth victim, which will shut it out of export markets for years.

“Longer term, there is the prospect of extra price competition.” he said. “If it comes along we will deal with it.”

AAC shares, which slid to 74 cents after the lacklustre float last year, have been on the comeback trail recently and briefly touched 96 cents.

They have lost ground again on news that mad cow disease in Japan has curbed the appetite for beef. There also have been unfounded fears that an anthrax outbreak in Queensland might hurt the company.

Mr Holmes a Court is due to announce the interim figures on February 12 and give an indication of how the $21 million full-year profit forecast is travelling.

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