17/05/2005 - 22:00

Tim Treadgold: Briefcase - Manufacturers wary of Asian FTAs

17/05/2005 - 22:00

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One step forward, one step back. If that sounds like marking time it’s because it is. And if you think it’s how the stock market is performing right now, you’re right.

One step forward, one step back. If that sounds like marking time it’s because it is. And if you think it’s how the stock market is performing right now, you’re right.

Plateaued, peaked, and waiting for direction are different ways of describing the same situation because we are in the middle of a risk-repricing situation where picking a positive investment theme falls into the too-hard basket.

While Briefcase has very few suggestions to make about what to buy when the market goes cold, there are a few investment themes emerging with a very clear sell sign attached. Not that your friendly neighbourhood broker is telling you this because he doesn’t get paid to say ‘sell’, and he risks frightening his corporate clients.

But if you look at the emerging fundamentals it is awfully hard to see anything good for Australian manufacturing if/when we enter a free trade agreement with Malaysia, Indonesia or China. Local manufacturers will find it all but impossible to compete with cheap Asian imports. On the flipside, FTAs with Asia may boost the profit performance of selected retailers who can more cheaply source their products – though the overriding theme here is sell any stock that makes stuff in Australia that can be made cheaper elsewhere.

And then there is the forecast return to drought conditions over much of the country. The Bureau of Meteorology has upped its El Nino warning to between 30 and 50 per cent, roughly double what it was 12 months ago and a clear sell signal for some stocks associated with the agriculture sector.

To wrap up this triple header of gloom it is also virtually impossible to find anything positive to say about companies exposed to the residential building sector as housing approvals slip, interest rates remain poised for the next move up, and profit margins collapse and surplus stock pushes prices down.

Cash, that often neglected commodity, is undoubtedly king at this stage of the market cycle, though some well-regarded advisers have been able to find little rays of sunshine. Goldman Sachs JBWere is a recent asset allocation report, and one of the few Briefcase has seen to actually say dump certain sectors in favour of others, is a firm believer in increasing cash reserves.

Goldman also sees no reason to alter its view of direct residential investment – code for don’t sell the family home because it’s your best tax-effective investment. But, when it comes to the big picture the advice is stark: sell Australian shares, sell higher-risk fixed interest assets (corporate bonds and the like), and sell most forms of property other than residential.

On the positive side, there is a generalised ‘increase’ advisory on global shares and government bonds. The view from Goldman, presumably with input from its US masters, is that the era of ‘free money’ implicit in the US Federal Reserves ultra-low interest rate policy over the past few years has ended.

“This generosity is now being steadily removed,” Goldman said. “The core issue for global investment markets is therefore unusually clear – at some point in 2005, rising US interest rates will force investors to reprice risk, particularly in fixed interest and credit markets.”

The next six months, at least, are likely to be a time when the market behaves with near-schizophrenic mood swings. One minute it will be positive because profits are strong, especially for selected resource stocks. The next it will panic as the interest rates thumbscrews are tightened.

If Briefcase is reading these signs correctly it is a time to do the worst possible thing by your broker – nothing. That’s right, sit it out, ride through the collective mood swings on the market, and wait for the rate-tightening process to end.

•••

Can anyone explain to a simple sausage like Briefcase what on earth is going on with Foodland Associated? Sometime last year a sort-of, kind-of, takeover bid was launched by Metcash Trading. It was such an appallingly complicated offer that Briefcase, and a few thousand Foodland shareholders, wondered whether it had been constructed that way simply to enter it in the Guinness Book of Records as the world’s most convoluted takeover.

Broadly, Metcash said it would buy Foodland’s Australian operations while spinning off the New Zealand operations into a separate business. Foodland says its quite capable of demerging itself, if it wants to, and that the Metcash offer of $8.55 in cash or 2.79 of its shares is too low for the Australian business.

But, having gone through the “you’re not offering enough” process, the fate of Foodland appears to drifted into some sort of limbo which has, so far, seen five supplementary bidders statements from Metcash and a consistent “take no action” recommendation from the Foodland board.

For the owners of Foodland this is a confusing time. The terms of the Metcash bid are little short of ridiculous.

Even if the price is right no-one can actually figure it out. Brokers are confused with about half saying do nothing and others saying Metcash looks like a winner.

If Metcash does win, which is possible, it will probably not be because it did anything smart. It will be more a result of shareholders being (a) confused by the terms of the bid, (b) unhappy that their board didn’t do more to clarify the position and (c) worried that if/when the Metcash offer lapses the price of Foodland will tumble back below the $20 mark.

If Briefcase were a Foodland shareholder it would probably be taking its money off the table by selling into the market, parking the cash (which is the best stuff to have right now) and then think about reinvesting later this year.

•••

“When the client moans and sighs

Make his logo twice the size

If he still should prove refractory

Show a picture of his factory

Only in the gravest cases

Should you show the clients   faces.”

David Ogilvy (and a piece of

priceless advice for everyone in

advertising).

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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