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Opinion: Can the sharemarket's rosy run continue?

By Andrew Macdonald of NZPA

Friday 11th February 2005

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With a slap-up run of corporate profits and fat dividends the sharemarket has been an investor's darling.

The economy's been going gang-busters, which has been translated into, for the most part, robust bottom lines.

But now market watchers are turning their eyes to the horizon - when will the rosy run end, and what does the year ahead hold?

The problem is finding a consensus of opinion.

Market commentator Brian Gaynor reckons corporate activity such as Wrightson's takeover of Williams & Kettle will spur the market higher this year.

Others disagree.

Hamilton Hindin Greene broker Grant Williamson says mergers and acquisitions activity will pale in 2005, although he says kiwi investors are cash rich and looking to house their money in equities.

"When you can still pick up a dividend yield of 8.5% to 9% from our leading stock (Telecom), which is ahead of the rate of interest (from bank term investments), then it's difficult to say our market is overvalued," he says.

However, Williamson says the cyclic nature of equity markets means investors will eventually shy from the big-name stocks for "smaller to mid-cap stocks... with more attractive fundamentals".

Meanwhile, market heavyweights, Telecom (up 12.7% in the year to February 10), Contact Energy (up 33.1%), and Fletcher Building (up 75.9%) have captured investors' attention.

It is these stocks that have underpinned the market's gains, pushing the NZSX-All capital index up 20% in the year to February 10.

By comparison, the benchmark NZSX-50 index, which includes dividends, has risen some 29% in the same period.

"It is very difficult to generalise and say the market is over-valued and I'm more of the opinion that you have to look at specific stocks and sectors," Williamson says.

"Though, the New Zealand sharemarket looks attractive in various sectors. I don't see prices coming down."

Stocks with a heavy domestic exposure - among them, Fletcher Building, Freightways, Wrightson, Contact, Sky City - should continue to perform well in 2005, he says.

Says Gaynor of the NZSX-50: "I'm not saying it will go up dramatically, although it has a dangerous head of steam at the moment."

Macquarie Equities investment director Arthur Lim agrees.

He says the market has been pushed along by the red-hot economy, but may slow alongside economic growth in 2005.

"Whilst it is unlikely that the market will retrace gains like it did in the past, it is likely that some stocks which have run particularly hard in the last two years will not perform in 2005," Lim says.

"Particularly vulnerable are companies heavily reliant on domestic demand, which have been expanding capacity in recent times."

He says economic growth has been running above long-term potential and that is unsustainable because of capacity constraints and the Reserve Bank's relatively aggressive monetary policy.

"Expectations are for the economy to slow down in 2005 to a longer term sustainable level of 2% to 2.5%," Lim says. "Investors should be cautious moving into 2005."

But so far, the much heralded economic slowdown hasn't been seen. Economic data this year suggests the economy is growing at an annual rate of about 5%.

This, after a September year that saw the economy grow by 4.6%, up from 3.7% in the September 2003 year.

Add to Lim's comments a warning by broking firm ABN Amro Craigs that corporate growth is about to slow.

Its research report - the so-called Kiwi Action Pack - gives earnings forecasts for 38 firms due to report in the current season, and found corporate profitability was "OK for now".

But there were factors to watch, including pressure on margins, the tight labour market, the Reserve Bank's monetary policy, currency, and commodity prices.

"The first challenge in 2005 is for investors to be realistic and not expect the market to be as rewarding in the last two years," Lim says.

"It would also be prudent for investors to review their portfolios with a view to lightening up on sectors which are heavily reliant on domestic demand as the principal driver of share price."

On this note, Lim suggests the agribusiness sector of the market as worth a close look, both because of commodity prices and New Zealand's potential free trade agreement with China.

"Investing directly in the farming sector probably represents the best avenue to participate in this positive developing scenario," Lim says.

"Agribusiness stocks like Pyne Gould Guinness, Wrightson and Affco could also provide exposure," he says.

In Wrightson the market has seen an aggressive firm seeking to rationalise the rural services industry. This week it won its battle to control rival Williams & Kettle.

Wrightson, says Williamson, is one of several firms that "probably has the firepower to look to make further acquisitions."

But, he says, widespread corporate activity in 2005 is unlikely.

"I don't see a lot of corporate activity in our market place because values have gone up significantly, which maybe dampens enthusiasm for Australian companies to look closely at our assets."

Gaynor, however, reckons some cash from the flush Australian market will find its way across the Tasman.

"I think a lot of our companies are vulnerable to the cash that is lying around in Australia," Gaynor says.

Aussie firms certainly saw value in New Zealand firms in 2004 -- as seen by Origin Energy acquiring 51.2% of Contact and Prime Infrastructure win Powerco -- and will likely see more as they move to enhance their wealth, he says.

And on that note there's been takeover talk about a lot of companies, including CanWest and Waste Management, and Gaynor believes someone may make a play for 19.9% of Telecom.

"I think the dominating theme this year is going to be mergers and acquisitions and that tends to have a positive impact," says Gaynor.

"I think that will compensate for the weak results appearing in some companies."

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