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Weekly commentary

Economy: The Australia’s Gross Domestic Product expanded by 0.7% during the June quarter, below expectations, as weak public sector spending offset a strong contribution from the mining sector. Even though inflation pressures remain under control as measured by the GDP price deflator’s inflation is trending higher. We forecast the RBA will raise official rates by 25 basis points before Christmas. The A$ has continued to weaken to record lows of US$0.549.

Equities: Australian market recovered well over the latter part of last week on a strong rise in NCP and Resource stocks. However, US technology & telecommunication stocks continue to correct downwards on concerns about their earnings outlook as US economic growth and semiconductor demand begin to slow. Australian equity market has already factored in a 25 basis point tightening in monetary policy. Company earnings growth is forecast to slow during FY01. We continue to favour companies that benefit from weak A$ including LLC, WSF, BIL, NAB and resource stocks, which also benefit from further corporate rationalisation. Most of the trading has been centred on the telecommunications market, as off shore fund managers re-weight their positions in the domestic Telco’s. Telstra continues to fall under heavy selling pressure as Fund managers re-value the company. Optus was a little more volatile, on further speculation the company was being being broken up, pushing the price to $4.50 late last week.

Oil continues to dominate the market, with OPEC’s decision to increase production having little effect on the oil price. BHP. WPL, STO, OSH & TAP all rallied on the back of a stronger oil price.

Resource stocks continued to hold firm as commodity prices rally against a weaker A$ which heightens the possibility of further corporate activity in the resource sector. NDY, MIM, PAS & WMC are all under the watchful eye of overseas predators.

Capital Flows

The Australian Small Industrial market, inline with the Nasdaq, was down over the week ending Thursday 14 September, declining 2.5% for the period. Volumes continue to be below the highs achieved through June to August reflecting a more cautious approach by investors, particularly on the part of retail investors, towards smaller stocks. Both domestic and international institutional investors are increasingly focussing on companies with defensive capabilities that also exhibit strong growth profiles.

Over the reporting period, Australian growth company results have come through largely inline with BNPPE expectations, the most notable exception being Melbourne IT which reported both slower revenue growth and lower margins than expected. It was subsequently significantly rerated by the market and is currently down 55% since reporting its result.

We expect that with the reporting season now complete, attention will increasingly refocus towards the opportunities for Australian growth companies over FY01. We continue to highlight those companies which have quality, internationally scalable business models and hence high short-term earnings growth and thus are likely to benefit from increased international interest as further expansion of their business models occur.

Telstra



Over the past week, TLS has come under further selling pressure from overseas institutions, option traders & disgruntled retail investors. Institutions are still concerned over the deal done with PCCW Hong Kong after their share price hit an all time low this week in Hong Kong. Telstra reported a full year profit after tax of $3.7billion. This result was softened by the expected increase in domestic competition, which could effect earnings growth going forward.

Retail investors are disgruntled that their initial investment of $4.50 is now worth $3.00 with another instalment of $2.90 due in November.

One saving grace for retail investors is the innovative products that will defer their payment for 18months to three years being launched by several brokers in the coming weeks.

The new product is similar to a short-term loan, however the interest & outstanding instalment are not due for up to 18months.

This product is called an instalment warrant. In essence, the investor sells the receipt to the broking house in return the broking house will pay the instalment for the investor, while the investor retains an entitlement to the underlying stock (e.g dividends). After a specified time, the investor must repay the broking house the full amount plus accrued interest. They will then own fully paid Telstra shares.

If investors fail to pay the instalment, the receipts will be siezed and the underlying instalment sold by the Telstra trustee. The trustee is legally entitled to demand defaulting investor’s pay all costs incurred in selling their receipts.

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