Nasdaq Comp at 250 Times Prospective Earnings
Investing in the future
By Robert Guy
Market pundits warn that 2000 will be a volatile year for
the Australian sharemarket, with the high-tech sector set
to face a test of whether it can deliver all it has promised.
And an ever-expanding bubble on Wall Street, tax
reform and concerns about interest rates will only serve
to compound the uncertainty facing investors at the start
of the new millennium.
There is no doubt that 1999 was a good year for
Australian sharemarket investors, but they needed the
stomach for a rollercoaster ride with the market trading in
a 360-point range.
The All Ordinaries Accumulation Index, which takes
account of capital appreciation and dividends, gained
15.5 per cent. This was the best result since 1995, when
the index rose 20.2 per cent.
The result was generally better than pundits had
anticipated one year ago, with most forecasting an
end-year target of about 2900. The upward surprise
stemmed from economic growth that showed no sign of
slowing, healthy earnings' growth and a
smaller-than-expected 25-basis point rise in official
interest rates.
The star performers of the Australian sharemarket were
the stocks that fell under the loosely defined "technology"
banner.
Best performer in the All Ordinaries was software
developer Sausage Software, with a 17-fold increase in
price, closely followed by Solution 6, another software
developer, with a 15-fold gain, and smartcard and
ticketing company ERG with an eight-fold rise.
Companies with their fingers in the high-tech pie, such as
media stocks, also enjoyed a positive year with gains of
33.5 per cent.
But the warning lights are clearly flashing, especially at the
smaller, or "casino", end of the high-tech sector. Brokers
and promoters eager to cash in on the high-tech trend,
day traders working off online market gossip sites rather
than fundamentals and the surging Nasdaq index in the
US have helped fuel what many see as a speculative
bubble.
"We believe there are at least elements of a bubble in the
high-tech boom, especially at the smaller end of the
market, which may eventually burst," says Eric Betts,
equities strategist with Nomura Australia.
The year 1999 also marked an active time for small,
listed mining companies, where the prime value of the
stock was derived from its sharemarket listing. These
were highly sought after by investors who wanted to put
in a more sexy business, such as an internet service,
instead of seeking a separate listing.
One fund manager says the activity is typical of that seen
in the latter stages of a bull market.
But the big question remains the timing of any prick in the
high-tech bubble.
"It is clear that a lot of stocks in that sector are
overpriced and that they are due for a pullback. But as
for when it happens, that is the hardest part to
determine," says Greg Matthews, the chief investment
officer with Macquarie Investment Management.
The year 1999 also marked the return to favour of the
resources sector, with the All Resources Index gaining 44
per cent.
Rapid and continuing upgrades to global economic
growth (most notably in Asia), rebounds in the price of
commodities and compelling valuations helped the sector
rise from the ashes of its Asian-crisis-inspired malaise.
Crude oil more than doubled in price over the year.
While there were some spectacular winners, there were
some stand-out losers.
Perennial sub-par performer Brierley Investments
recorded a 17 per cent fall, while beleaguered insurer
GIO fell 53 per cent after announcing massive losses in
its reinsurance division before it was put out of its misery
by AMP.
While analysts have their concerns about 2000, there is
no denying the fundamental backdrop will be supportive
for the market.
Economic growth is estimated to maintain a pace in
excess of 3.5 per cent, inflation (while steadily rising in
the latter part of 1999) will remain within the Reserve
Bank of Australia's 2 per cent to 3 per cent target band
and corporate earnings are likely to see double-digit
growth.
"All the leading indicators have growth looking like a
freight train," says Matthews.
He adds that at 3100 points, the All Ordinaries is looking
fairly valued, but he expects it to move between 3400
points and 2800 points over the coming year, possibly
slipping as low as 2600.
Consensus forecasts point to 20 per cent earnings per
share growth for the All Ordinaries, with industrials
predicted to produce EPS growth of about 13 per cent
and resources expected to squeeze out a stellar 70 per
cent growth in EPS.
"The earnings picture is the best since 1995. Looking at
earnings revision trends, we are more confident than
usual that these forecasts are achievable," says Betts.
"Perhaps appropriately for a new millennium, we think
the year 2000 will see a battle between two competing
paradigms for ideological dominance - those of the 'old'
and 'new' economies."
He adds: "We expect the Australian equity market to stay
strong as the new economy paradigm continues to rule
investors' thinking. We think the sharemarket will
continue its dangerous rally and reach new highs of 3400
or more in 2000, but this will come amid increasing
volatility and rapid shifts in investor sentiment.
"Which sectors are in favour will depend on which of the
two paradigms dominates investors' and central banks'
thinking at the time."
Many investors believe the high-tech sectors, including
media and new media such as the internet, will continue
to run hard while the "miracle" of the new economy
remains in favour. But if inflation begins to appear on the
radar screen, then investors may start to favour the less
"sexy" but relatively cheaper old economy sectors of the
market such as the basic industrials.
Anton Tagliaferro, investment director with Investors
Mutual, says investors are likely to start considering
businesses with good franchises and solid earnings
growth if the high-tech sector loses favour with the
market.
He also expects further corporate activity after a solid
year of mergers, takeovers and floats, most notably the
public listing of another 16.6 per cent of
telecommunications giant Telstra.
Rationalisation continued in the cyclical industrial end of
the market, with Smorgon buying ANI, Email buying
Southcorp's white-goods division and UK-based
Hanson's $4 billion takeover for Pioneer.
Andrew Brown, director of equities with Rothschild
Australia Asset Management, says a higher degree of
corporate activity will be supported if the bull market
continues and the "personality cult" in the market also
persists.
He is referring to the rise to prominence this year of
financial entrepreneurs, most notably in the technology
sector. These include Jodee Rich, managing director of
One.Tel, and more notably PBL chairman James Packer
whose ventures into the telecommunications and fund
management sectors represented only a portion of his
dealings through the year.
Brown says, however, that there is likely to be a subtle
change in the nature of the financial entrepreneur, with the
focus switching to the revitalisation of companies in the
manufacturing sector. Assisted by changes to the taxation
system, these individuals may choose to swap their
high-priced scrip for low-priced scrip, then restructure
the business and have that reflected in a higher share
price.
But there are a few hurdles that the market will have to
overcome over the course of 2000, which may prove a
hard slog in the second half of the year. Changes to the
tax system, most notably the introduction of the GST, will
clearly produce a challenge for the equity market as
headline inflation spikes above 5 per cent, with a
flow-through into the bond market and into fair-value
models for the sharemarket.
One analyst from a highly rated institution says the 5 per
cent-plus headline inflation number will cause some
concerns among offshore investors.
Other challenges will be the proposed changes to the All
Ordinaries Index and what benchmark will be used by
fund managers to measure performance.
As always, sharemarket analysts will be watching Wall
Street, especially the high flying, technology-laden
Nasdaq index, currently trading at 250 times prospective
earnings. Some institutions believe there is a high
probability that the US sharemarket will see some form
of correction in the first half of the year. |
