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Sharemarket tips for 2006

By Kate Perry of NZPA

Wednesday 4th January 2006

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With market chatter increasingly pointing to an economic slowdown in 2006, Kate Perry of NZPA looks at what the experts are picking for the sharemarket in the year ahead.

Brokers don't expect 2006 to be particularly easy for the sharemarket and are advising investors to take care when selecting stocks and keep an eye on economic trends.

Head of research at First NZ Capital Barry Lindsay said the sharemarket would face "quite strong headwinds" next year in the form of slower economic growth .

He expected the New Zealand sharemarket to continue to underperform other markets around the world -- at least in the early part of the year. But he said the overall result for the calendar 2006 should be positive, in the order of a 7-10 percent total return.

Much would depend on when, or if, there was any relief on the interest rate front and if there was any depreciation in the New Zealand dollar.

"You could get quite a seachange if monetary policy eases earlier than we expect, which could lead the exchange rate to ease earlier than expected which would both be positive to the market.

"But at the moment we see all of those positives being somewhat delayed so don't see much in the way of fireworks from our market in 2006," he said.

In terms of picking stocks he recommended minimising exposure to companies that looked most vulnerable to an economic slowdown, and emphasising stocks with good solid dividends.

ABN Amro Craigs also said it was focused on long-term blue chip investments that were "consistent, prudent and conservative" performers. In terms of defensive, high yielding stocks, Christchurch brokerage Hamilton, Hindin, Greene, said you can't go past market leader Telecom.

"With a forecast dividend of 48 cents per share for the 2006 financial year the very attractive yield should support the ongoing performance of the share price," HHG said.

Fellow blue chip stock Contact Energy also warrants attention next year, according to First NZ Capital's Lindsay. He said the stock has been "pretty savagely treated" by the market in recent months, hitting a year low of $6.19 in mid December, from a high of $8.06 in July.

Much of the recent selldown has been due to growing concerns about the higher price of gas in the post-Maui era. Lindsay sees an upside for the stock in excess of $7 a share. ASB Securities agreed that concerns about Contact Energy's margin contractions were overdone.

"The stock will benefit from low lake levels this year leading to higher spot prices electricity," the brokerage said. Another top stock which may have been under-rated this year was Fletcher Building. HHG said the outlook for the stock remained positive, despite an expected softening in the residential building sector.

"... this will be offset by the strength of non-residential construction and infrastructure spending in both Australia and New Zealand," HHG said.

Fletcher Building has built up its presence in Australia through acquisitions. The 2006 financial year will include a full year's contribution from Australian company Amatek Holdings which Fletcher Building bought for $582m in May. This will bring Fletcher Building's Australian revenues to about 35% of total revenues.

In mid-December Citigroup upgraded its rating on Fletcher Building to "buy" from "hold" and has a target price of $8.40 on the stock.

ASB Securities and First NZ Capital agreed the outlook for Mainfreight was positive for next year. Mainfreight was one of the better performing stocks of 2005, starting the year about $2.20 and finished it at $3.65. First NZ Capital has a target price of $4.20 on the stock.

ASB Securities said that as about 40% of Mainfreight's earnings were now generated offshore, the company was well insulated from any potential slowdown in the New Zealand economy.

First NZ Capital said the company will start to reap the benefits from the restructuring of Owens which it acquired a year ago. Courier company Freightways was also on First NZ Capital's list as a stock to watch.

"We see it having an excellent track record and performance during past economic cycles, with an above average dividend yield and we think it can continue to grow its earnings at a double digit base this financial year and next," Lindsay said.

New Zealand Exchange chief executive Mark Weldon said he was reasonably optimistic the looming economic slowdown would see the sharemarket flatten out rather than crash.

"I tend to think that New Zealanders love to start thinking about the train crash, well before the rest of the world tends to.

"People love to jump on the negativity bandwagon. The risk is the more that it happens, it changes business confidence and creates a self-fulfilling prophecy," he said.

Other stock picks for 2006

FISHER & PAYKEL HEALTHCARE ranged between $2.75 and $3.86c over the past 12 months;

Recommended by: ASB Securities.

Fisher & Paykel Healthcare's focus on exports and its high exposure to the US health market and relatively small reliance on the New Zealand and Australian markets were seen by ASB Securities as positives for the company.

GUINNESS PEAT GROUP (GPG) ranged between $1.68c and $2.17 over the past 12 months.

Recommended by: First NZ Capital

First NZ Capital said there was a lot of hidden value in its unlisted subsidiary, the Coats Group.

RENAISSANCE ranged between 77c and $1.45 over past 12 months.

Recommended by: First NZ Capital.

Holds exclusive distribution rights for Apple products such as iPods and iMacs in New Zealand.

Share price has roughly double in last 15 months and First NZ sees potential for share price to hit as high as $1.70.

CANWEST MEDIAWORKS ranged between $1.53c and $2.44c.

Recommended by: ASB Securities

The owner of TV3, is seen as a potential winner next year as it gains market share over TV One. "The recent winning of rights for the 2007 Rugby World Cup is a major coup for the company," ASB Securities said.

NEW ZEALAND OIL & GAS (NZO) ranged between 75c and $1.28.

Recommended by: ASB Securities.

The company has three major developments on the go, which should also add value: the Pike River Coal joint venture which is due to be floated next March; the Tui Oil area is set to start oil production in March 2007; while the contract for the design and tendering for the Kupe oil and gas project is due soon.

VECTOR ranged between $2.58c and $3.37c over past 12 months.

Recommended by: ASB Securities.

ASB Securities said the stock has been oversold this year on regulatory concerns, after the Commerce Commiss ion recommended its gas pipelines be subject to price control. ASB Securities said the company was well managed and represented good value.

NUPLEX INDUSTRIES ranged between $3.39c and $6.20c over past 12 months.

Recommended by: HHG.

HHG said the resins producer was oversold after its full year results did not meet investors' expectations due to higher raw material costs and the effect on margins. But things looked brighter for the coming year.

"While raw material prices in the key resin business have remained at higher than normal levels the company has indicated that margins are slowly recovering, along with the demand for products."

RYMAN HEALTHCARE ranged between $3.16c and $5.65 over year.

Recommended by: HHG.

A solid performer in 2005, Ryman, which operates healthcare and resthome facilities for the elderly, is seen by HHG as another hot pick for next year.

HHG said it expected further share price appreciation as the company was well positioned for growth over the long term.

"Ryman has the benefit of being relatively unaffected by cyclical conditions due to the ongoing and increasing demand for such facilities due to New Zealand's demographics," HHG said. PROVENCO ranged between 71c and $1.01.

Recommended by: HHG.

The payments solutions company has benefitted from security changes to standards for EMV (Europay, Mastercard and Visa) cards. These changes will come into force in New Zealand next year, which should underpin domestic earnings growth .

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