20/12/2005 - 21:00

Tim Treadgold: BRIEFCASE - Property to feel the heat in 2006

20/12/2005 - 21:00

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WHAT happened yesterday is not what will happen tomorrow, an observation that either convinces the reader that Briefcase is barmy, or deep thinkers will recognise as sound investment advice for 2006.

To test this simple hypothesis, go back 12 months and ask whether anyone identified the boom in speculative uranium stocks, or the re-discovery of small iron ore producers, as some of the hottest plays of 2005. No way, Jose.

The game now is to correctly identify the trends that will produce profits over the next 12 months, something Briefcase will attempt while issuing the standard warning about seeking your own advice on specific investments.

General observation one: The property market is under pressure, and don’t believe that Perth is immune. Interest rates are rising worldwide. The property bubble is a global event and, quite simply, no market goes up forever – producing a Briefcase forecast the Perth residential prices will slide by about 10 per cent during 2006.

General observation two: China is trying to apply the brakes to its rampant economy, and there is a danger that when the central committee of the communist party in Beijing taps the brake pedal it will tap too hard, with a potentially severe (though short-term) impact on commodity demand and price – producing a Briefcase forecast that prices for most metals will drop during 2006, as will mining company share prices.

General observation three: There will be an X-factor during the year to upset the investment apple cart. No-one knows that this factor will be (that’s why it’s called X), but a pre-emptive strike by Israel on Iran’s nuclear installations is not a bad tip.

How will these events affect our world? Well, these are the big picture tips on critical economic factors from Briefcase for 2006:

Interest rates, up between 0.25 per cent and 0.5 per cent over the course of the year.

The all ordinaries index, which rose by 15 per cent in 2005, will fall by 10 per cent in 2006.

The materials index (mining), which rose 34 per cent in 2005, will fall by 15 per cent in 2006.

The gold price, which rose by 17 per cent in 2005, will rise by a further 5 per cent in 2006.

The oil price will stick around $US60 a barrel, causing pain for everyone except oil stock investors.

Residential property, which has risen for seven straight years, will fall by 10 per cent in 2006.

Of the big-picture factors the one which is easiest to identify is interest rates. Last week’s 0.25 per cent increase in US rates was the 13th successive increase by that country’s central bank, and while the 4.25 per cent base rate seems innocuous there is a ‘boiling frog’ aspect to the cost of money debate – one where the victim doesn’t identify the pain because it is occurring so slowly.

Briefcase understands the argument that Australian rates have not risen as fast as those in the US – but that’s a classic example of trying to apply last year’s events to next year, and to miss the point that the current boom in the Australian economy is creating inflation pressures, that we are two years away from the next federal election, and the first quarter of 2006 is the perfect time to ratchet-up rates, especially when softening the blow with tax cuts.

What all this means is avoid at all cost interest-rate sensitive stocks, such as those hybrid investment vehicles created by Macquarie Bank and, locally, by Alinta. The current market in Alinta Infrastructure Holdings is a stark warning. After surging to a post-float high of $2.42 on October 5, Alinta Infrastructure is now bobbing along at around $1.91, a very painful 51 cents loss for someone, or a somewhat embarrassing 21 per cent fall in little more than two months.

The China factor is harder to read, but just as important to the Australian economy. On one hand, China’s demand for raw materials will remain strong. On the other, China is demanding lower prices; a demand that will be tested in the current round of iron ore price negotiations.

Briefcase confesses that its view on China varies from day to day, although the latest news is worrying, with the Chinese government reporting that a raft of industries are “over-producing”.

There is, for example, said to be excess production of steel, automobiles, copper, and aluminium, while other industries are in danger of over-production, including electricity, coal and textiles.

In other words, China’s boom has done what all booms do – gone too far. During the first few months of 2006 the world will discover how hard the Chinese apply the brakes, and what effect that has on Australian exports.

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Being more specific on what stocks are hot for 2006 and beyond is outside the remit of Briefcase, and for the nitty-gritty detail an easy escape is to call on the services of an expert, in this case the venerable old house of Goldman Sachs JBWere.

A few days ago, in keeping with the Briefcase theme that times change, Goldman produced a fascinating table that showed the top 25 stocks, in terms of growth in annual earnings per share over the past three years – and a second table showing the forecast top 25 in EPS growth over the next three years.

Looking at just the top 10 it is sobering to see that only two of the historic list make the forecast list. The goldminer, Newcrest, produced 80.9 per cent annual EPS growth between 2002 and 2005 to claim second place on the historic list and is tipped to deliver 20 per cent growth between 2006 and 2008 to claim eighth place among the forecast fast growers. The other member of both lists is Rupert Murdoch’s News Corporation with 50 per cent historic annual EPS growth and 4th rank, and a forecast 21.7 per cent and sixth.

Goldman, which calls its analysis “an emerging shift in earnings leadership”, has Lihir Gold, CSL, Patrick Corporation, Cochlear, Computershare, News, James Hardies, Newcrest, Rinker and ResMed as its fastest growers for the next three years – to form the basis of an interesting tip sheet.

But, on a more sobering level, the annual EPS growth rate for the next three years is a lot slower. Bluescope Steel was the fastest on the historic EPS list at 118.4 per cent, but Lihir wins the forecast list with expected growth of 38.3 per cent, and even Qantas with a lowly forecast annual EPS growth forecast of 12.2 per cent makes the future list  – a sure-fire sign that the overall market will be a lot more sluggish for some time.

•••

“A pessimist is someone who, when given the choice of two evils, chooses both.” Oscar Wild

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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