The World's Your Oyster, Say Brokers
Sun Herald
Sunday December 7, 2003
INVESTORS should start switching from local to global stocks such as BHP Billiton and Rio Tinto as the rest of the world begins a synchronised global recovery, brokers say.
Then it should be the turn of industrial stocks the Aussie globals that trade overseas which stockbrokers Goldman Sachs JBWere expect to lift in the first quarter of next year.
``It is difficult because the stockmarket has priced in the recovery to a degree, but the next leg up [in share prices] is to come," said JBWere OnCall manager Mike Kendall .
``If the global economy does pick up as most expect, the Australian dollar will have a bit more to run then other currencies should strengthen in 2004-5 [against our dollar]," Kendall said.
While these exporters and offshore operators are being squeezed now, real business growth in the US and Europe will ease these pressures.
The Australian economy has put in a world-beating performance for three years, avoiding the overseas recession. Our companies have outperformed international shares, helped by a record low dollar boosting exports and a housing boom boosting domestic growth.
Now Australia's dream run is more vulnerable than three years ago because low interest rates, a low dollar and lower house prices have all escalated, said head of strategy at Schroder Investment Management , Simon Doyle .
With higher interest rates, the dollar going up from 48 US cents to 73 US cents and the building industry tipped for a slowdown here, there are bright prospects overseas of six months of global economic recovery. Investors are starting to look offshore to provide better economic returns.
As Australian stocks lose momentum, companies that trade overseas such as resources giant BHP Billiton, James Hardie's US plasterboard business, News Corp and Westfield's American shopping centres provide an alternative to international shares. But the rising Australian dollar is complicating the issue.
The Australian global stocks compiled by CommSec (see chart) have been priced down as the Australian currency has risen.
Yet, putting currency aside, investors will be attracted by the prospect of strong world growth while Australia's domestic economy takes a breather.
``The Australian global stocks have been hit by the rising Australian dollar but over the next year the Australian economy will peak and possibly start slowing just as the global economy starts expanding, to the benefit of Australian global stocks," AMP market analyst Shane Oliver said. ``In contrast there will be a loss of momentum by domestic stocks such as banks [which] should be hit by lower housing finance."
Resource stocks such as BHP Billiton, Rio Tinto and WMC Resources look like a safe bet, Godfrey Pembroke strategist Cavil Singh believes.
``The rising demand for commodities should drive up prices higher than the currency appreciation," he said.
Working out the impact of the rising currency on earnings per share is complicated by hedging, which seeks to eliminate any losses or gains.
Metal prices are a natural hedge against the rising dollar for BHP Billiton.
CommSec economist Craig James said Hills Industries , a largely domestic-focused company, wins on the imports but loses on its manufactured exports.
Investors should avoid knee-jerk responses to currency issues, he warned.
``When assessing the implications of a stronger currency on companies, investors need to assess the impact on both revenue and expenses, the outlook for revenue growth as well as the nature and extent of hedging applied," James said.
``It may be tempting to react to the vagaries of currencies but longer-term investors should keep their gazes firmly fixed on company and economic fundamentals."
MAKE A WATCH LIST
Amcor Margins will improve with market power and control over key inputs.
AMP The near-term price will be driven by uncertainty regarding the demerger, management concerns, capital concerns in Britain and takeover speculation.
BHP Billiton Set to reap rewards from continual improvement in management and surging Chinese demand for commodities.
Brambles Apart from CHEP Europe , other businesses performing well. Big upside when CHEP fixed. Very good business model.
James Hardie Continues to gain market share in key US housing markets. Successful roll-out of roofing products could provide substantial growth opportunities.
Lend Lease After a painful period of restructuring, the company is successfully reinventing itself with a simpler business model, a clearer strategy and a new team of senior executives.
National Australia Bank Has a strong retail and wholesale banking presence in its key markets and its customer base is more affluent than its peers. Risks remain around British operations and AMP.
News Corp Large upside potential if cross-media laws are liberalised in the US, Britain and Australia. Potential upside from successful purchase of DirecTV .
Rio Tinto A quality company delivering solid results from a diversified portfolio of assets.
Westfield Has a proven vertically integrated business model that has consistently delivered shareholder value.
© 2003 Sun Herald
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