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Weekly commentary

Economy: The Australian economy continues to perform strongly growing between 4 per cent and 5 per cent per annum. Solid growth during the first half of 2000 kept the annual rate of rise in growth at 4.7 per cent pace.

While housing is set to slump (based on approvals data already known), the super-low $A is boosting exports strongly, thus ensuring any slowing in local growth will be mild at worst.

Inflation pressures in the economy remain under control but are trending higher as up-stream prices begin to rise in the face of high oil prices and a low A$.

Wages growth of 3-4 per cent is comfortably within the RBA target range.

However, looking ahead, the Bank may be concerned that upstream price pressures could flow through to prices and wage-settings as we move into 2001, if unit labour costs cannot be offset by productivity growth, since it has slowed to a 2 per cent pace from the 4 per cent achieved during 1998 and 1999.

The Reserve Bank has already lifted official cash interest rates from a record-equalling low of 4.75 per cent to 6.25 per cent. It may still lift rates to 6.50 per cent by year-end or early 2001 to head-off any build-up in inflation pressures.

The increasing likelihood that interest rates are near a peak is good news for investors in bonds and shares. Equity markets usually do well when rate rises are behind them.

Australian companies reported the best profit growth in 10 years over the reporting period ended 30 June, led by a strong rise in resource company profitability.

The strong results were underpinned by recovering commodity prices, a strong domestic economy and sustained consumer confidence. Company profitability rose by 31 per cent over the past 12 months.

In the coming 12 months profitability is likely to be effected somewhat by higher interest rates and increased competition, which is likely to squeeze margins.

Companies exposed to offshore earnings should be major beneficiaries from the weak A$.



interest -sensitives attractive

Some factors are decidedly favourable towards Australian equities at present – credit growth is very strong, the industrial side of the market is about fair value relative to current bond yields, local institutions are cashed up and offshore institutions are mostly underweight Australian assets.

The latter two conditions suggest latent buying power for equities particularly if the A$ stabilises. In our view, we believe the $A is close to a bottom.

That also attracts investors to Australian assets. The fact that most of the Australian market has languished so far in 2000 despite lower bond yields also suggests value and better prospects for the remainder of 2000 and 2001.

The near end to interest rate rises in Australia and end to US interest rate rises, makes the interest-sensitive sectors of the equity market attractive; notably Banks, Infrastructure & Utilities, Listed Property Trusts, non cyclical consumer goods, Alcohol & Tobacco and Insurers.

We would underweight the following sectors Paper & Packaging, Diversified Industrials & Miscellaneous Industrials.

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