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    Why our shares are ready to fly
    RICHARD WEBB
    August 1, 2010
    Source: The Age

    THE stars are perfectly aligned for shares to rally hard to the end of the year, stock experts say.

    Some are tipping the ASX 200 will reach 5200 points by year end, for a stellar gain of more than 15 per cent in the next five months.

    Here's why they are so bullish:

    Shares are 20 per cent undervalued - the current forward price-earnings ratio on the sharemarket (a measure of value based on expected company earnings) is 11.5 times, against the long-term average of 14.5 times.

    Company profit results in the current reporting season are expected to be relatively good. They are tipped to show average solid earnings per share growth of about 10 per cent, although partly through continued cost savings, according to AMP Capital Investors chief economist Shane Oliver.

    After the news on inflation last week, interest rates are firmly on hold, which brings much-needed stability for investors and greater confidence for businesses and consumers, according to Austock senior adviser Michael Heffernan.

    The property market is showing signs of faltering, following the rise in interest rates at the end of last year to May this year. This led to the sharpest rise in mortgage rates (from about 5.15 per cent to 6.75) in at least two decades, according to Macquarie Bank interest rate strategist Rory Robertson.

    It all looks good for local shares. Yet the Australian sharemarket has been one of the weakest this year.

    Local shares have fallen more than 8 per cent this year and have been outperformed by markets in Europe and the US, areas with struggling economies.

    ''Because we are one of the best-performing economies, we are also one of the only ones to have seen interest rate rises so far this year,'' says Dr Oliver ''Also, we are heavily tied to China, and it has had its foot on the brake too � But the inflationary pressures are now receding in both countries, so we can start to take some of the pressure off.

    ''There are increasing signs that Chinese shares have either seen or come very close to their lows, and just as they topped last year ahead of the global correction in shares this year, they are likely to lead global shares higher again.''

    If these market watchers are right and shares are about to rally towards the year end, what should you look at to ride the wave?

    Sean Conlan, senior adviser at Macquarie Private Wealth, believes company outlook statements will take on a critical role in the current reporting season.

    ''Positive earnings surprises are likely to be few, with strong franchises with pricing power the most likely candidates,'' he says.

    He picks AGL, Coca-Cola Amatil, Cochlear, Origin Energy and ResMed as potential winners in the current reporting season, plus resource majors BHP and Rio.

    Mr Heffernan is a fan of Coca-Cola Amatil and the big two miners too, as well as Wesfarmers, CSL, GUD, Woolworths and the big banks. ''I think the profit reporting season is going to be OK, without shooting out the lights,'' he says. ''But the profits for the December half are going to be a lot stronger.''

    Dr Oliver expects financial year earnings to June next year will lift a further 15 per cent.

 
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