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Valuations alone won't drive up stock prices

Monday 29th September 2008

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As stock markets have sunk, well-managed, low-geared companies have been among those dragged down. Just because they're cheap doesn't mean it is time to buy, according to UBS Securities.

"Against a backdrop of earnings downgrades and considerable macro headwinds, we think it will be difficult for equities to sustain a rally in the medium term, despite valuations which are undemanding from a historical perspective," strategists Jeffrey Palma, Jennifer Delaney, William Darwin and Trevor McDonough said in their global equity strategy report.

Stock markets may rise in Asia today, after the US Congress sped their approval of the US$700 billion package the Treasury will be allowed to spend buying bad loans off financial companies. Still, the rescue plan may not be enough to prevent a global slowdown that's already hit New Zealand.

Figures last week confirmed the nation is in its first recession in 10 years and probably hasn't climbed out yet, with the Treasury predicting a pick-up starting in October.

"We expect construction activity to slow sharply in 2009" in New Zealand, said Shamubeel Eaqub, economist at JBWere Goldman Sachs. He characterizes the outlook for the construction sector as one of "steepening weakness."

He cites rising volumes of empty, unsold homes, deteriorating housing affordability, up to 55,000 job losses in construction and a potential drop in farm sector construction as commodity prices ease.

Fletcher Building, the biggest construction company on the NZX 50 and a seller of building products worldwide, fell 1.9% to NZ$7.21 on Friday. It has gained 13% in the past three months, while the NZX 50 fell 2%.

The company is bracing for a tougher year as demand weakens in its major markets, according to chairman Rod Deane, who heads a board that includes former CEO Ralph Waters.

"There is little doubt that we are in for a tougher
year than the one just experienced," chairman Rod Deane said in the company's annual report, released today. "We are managing our businesses with a focus on cash flow and to maintain financial strength."

Chief executive Jonathan Ling last month declined to forecast 2009 earnings, after posting a 10% gain in 2008 EBITDA.

The economy may have contracted 0.5% in the third quarter, according to Bank of New Zealand head of research Stephen Toplis. Annual GDP growth "will actually turn negative in Q3 and stay that way until Q2 2009," he said.

The economy's 0.2% contraction was smaller than economists had predicted. Still, Toplis said a 1.4% lift in manufacturing was the result of farmers sending more livestock to be processed because of drought. As a result, he predicts weaker manufacturing in the third quarter and forecasts the central bank will cut the official cash rate 50 basis points to 7% next month.

By Jonathan Underhill

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