a new economic order approaches

A new economic order approaches
ANTHONY KEANE | June 29, 2008 11:30pm

AFTER such a horrible 2007-08, many stockbrokers and other market watchers are coy about picking the top stocks to own for the new financial year.
Any of their tips last year - apart from resources stocks which are enjoying a long-running boom - are likely to have resulted in heavy losses for investors.

Financial stocks - including the banks - are down 32 per cent since last July. Listed property trusts have tumbled 38 per cent. Utilities have dropped 32 per cent and industrial companies have slumped 35 per cent.

Almost everyone expects the bumpy ride to continue for at least the next few months, but poor sentiment and share price weakness have created some long-term bargains.

Mining and energy stocks again remain the most popular choices for the year ahead, despite strong gains in the past five years that have seen BHP Billiton shares rise 409 per cent, Rio Tinto climb 366 per cent and Woodside Petroleum surge 436 per cent.

Hood Sweeney Securities director of financial planning services Matthew Rowe said his firm's preference was the safety of cash term deposits for the next few months, because the volatility current hammering returns was expected to continue.

"However, stock selections to consider include sectors that have higher earnings-per-share-growth expectations on a relative basis, such as energy, resources and healthcare," he said. Mr Rowe said people should also look at high fully-franked dividend payers, and stay with large cap companies with proven management.

"The strong Australian dollar, the rising cost of debt and the deteriorating global economic outlook are likely to have a negative effect on Australian company profit margins," he said.

"Volatility and negative sentiment are expected to remain a feature of the share market over the next few months.

"The ability of the Asian market - a major export destination for Australian commodities and products - to withstand a slowdown in the U.S economy will remain a vital issue for the Australian economy and share market."

Grand Private Equities stockbroker Wesley Legrand is cool on anything not related to resources, and recommends investors hold a bigger proportion of shares in miners, oil and gas, uranium, gold, fertilisers, steel and scrap metal, engineering and contracting, agriculture and resource services.

"It has been our long-held view that the urbanisation of China is the most important event to happen in the world since the industrial revolution of the 18th and 19th centuries," he said.

"This is not a short-term cyclical event. The current urbanisation of the Chinese economy, followed by India, represents the initial phase of a new economic order which will reshape the global economy forever."

Mr Legrand said the old financial adage "when the U.S. sneezes the rest of the world catches a cold" appeared to be no longer relevant.

"Despite the worst housing market in the U.S. since the Great Depression of 1929 and a significant U.S. economic slowdown, Chinese economic growth fell by less than 1 per cent to 10.6 per cent in 2008 from 11.4 per cent in 2007," he said.

"We have long maintained that Chinese urbanisation is driving a permanent structural increase in energy and base metal demand, and fortunately for Australia we are very rich in both."

A recent report by McKinsey Global Institute predicts China's urban population will grow from 572 million people in 2005 to 926 million by 2025 and one billion by 2030. "In 20 years, China's cities will have added 350 million people - more than the entire population of the United States today," says the report, Preparing for China's Urban Billion.

"By 2025, China will have 219 cities with more than one million inhabitants - compared with 35 in Europe today - and 24 cities with more than five million people."

With up to 50,000 skyscrapers to be built - the equivalent of 10 New York cities - and 170 mass-transit systems, China is going to need a lot of iron ore, copper and other natural resources that are buried underground in Australia.

Mr Legrand said the consensus view among analysts and experts was that we were currently at the peak of the commodity price cycle and that 2009 would be the earnings cycle peak.

"The chorus of investors and strategists calling this the top in resources and commodities has never been louder, but they are using old, outdated rules and their psychology is flawed, frozen in time after a 30-year mining bear market since the Japanese industrialisation of the 1960s," he said.

"However, the largest players in the global mining industry, such as BHP Billiton, Rio Tinto, Brazil's Vale, Switzerland's Xstrata, Russia's Norilsk, India's ArcelorMittal, Chile's Codelco, the American oil giants, the Canadian uranium miners and the Middle Eastern and Asian sovereign wealth funds are telling you something completely different.

"For the past five years, the insiders have been telling you this is structural and the outsiders have been telling you this is cyclical, and for five years the insiders have been right and they will continue to be right."

Not everyone thinks resources are the only place to be in 2008-09.

Zobel financial planner Matthew Bazzica said healthcare, telecommunications, financial and food sector stocks should outperform others.

"Diversified industrial stocks like Wesfarmers will provide solid results in the current environment," he said.

"Although not share market specific, investing in gold has proven to be a good way to preserve capital in times of inflation.

"Also, investing in property trusts that are lowly geared should provide good results as well as providing the necessary diversification of investing."

Ord Minnett investment strategist Simon Kent-Jones said investors should avoid taking big bets on one sector, such as resources or banks.

"At this point in the market you don't want to get fancy," he said.

Mr Kent-Jones said investors should expect a mixture of good news and bad news in the months ahead.

"We are going to see some volatility but that's not to say there aren't opportunities," he said.

People should have exposure to the resources sector. "That underlying 'stronger for longer' theme is still going to be important," he said.

Mr Kent-Jones said others likely to do better than most included selected healthcare stocks, such as CSL, and consumer staples such as Woolworths.

He said patience was required with listed property trusts, which had been through a "very tough period", and investors examining LPTs should look for a yield greater than 8 per cent and relatively low debt levels. "I think it's a while before we see the recovery in property trusts - they have to sell assets to relieve their balance sheets and will find that a pretty tough experience."

What about the banks, which have stung so many shareholders?

"The outlook is cautious but my sense is they're probably doing okay," Mr Kent-Jones said.

He said investors should expect bank dividends to remain flat over the next couple of years. Ord Minnett's preferred picks for the sector are the Commonwealth Bank and Westpac, the more conservative of the big banks.

Any sectors to be wary about?

"I find it hard to get bearish on any sector because there's a fair bit of value," Mr Kent-Jones said.

"One I would pick out is energy, if you take a bit of a contrarian view," he said. If the share market was to reach Ord Minnett's December target of 6000 points - up 12.2 per cent from today - the oil price would have to fall, which would put pressure on energy company shares, he said.

With some analysts tipping oil to rise from current levels of $US140 a barrel to $US200 a barrel, others say holding oil stocks is a wise move.

Lincoln Indicators managing director Tim Lincoln said now was the time to re-evaluate share portfolios, with an eye to companies benefiting from the global oil price surge.

"Based on our financial health analysis, Lincoln has identified companies with exposure to the energy sector that are healthy, growing, efficient and undervalued," he said.

Lincoln's five stocks to watch are Australian Worldwide Exploration, Woodside Petroleum, Arrow Energy, Adelaide-based Stuart Petroleum, and Imdex.