When cheap means value bonanza 27th July 2002

James Dunn - The Australian


AUSTRALIAN investors find themselves in a situation just like Christmas Day: they know that the bargains are ready, but the doors leading to the big sales are not yet open.

They will open when the tyranny of Wall Street allows it, when shell-shocked US investors talk themselves into recovery.

That may have to wait until after that nation's chief executive officers swear to the veracity of their company's accounts, scheduled by September; or until the threat of a relapse into recession fades.

With $US7.6 trillion ($13.99 trillion) gone to money heaven courtesy of the share market, the US consumer might not feel much like spending in the manner to which his nation has become accustomed. (As in Australia, the US consumer accounts for about two-thirds of the economy.)

There is also the uncertain geopolitical outlook weighing on the minds of US investors.

"I think there has been a massive panic attack over corporate fraud," says the head of strategy at broking firm Macquarie Equities, Tim Rocks.

"I don't think it pervades every company. I think we'll see that there is a great deal of money waiting to get the August reporting period over without incident, before heading back into the market."

Motivated Money's Peter Thornhill discounts the "negative wealth effect" argument.

"The US share market has lost $US7.6 trillion in value since its peak, and that is supposed to be enough to curtail consumer spending, sending the US economy back into recession," he says.

"But I don't believe that US consumer spending will drop off that much.

"I was living in Indonesia when the Asian currency crisis hit in 1997-98. Recession doesn't even begin to describe what happened to the Indonesian economy: its GDP fell by more than 20 per cent. We're talking Depression. But you know what? Two hundred million Indonesians got up every day, they kept on consuming, and the place didn't grind to a halt."

Once the US situation clarifies itself, says Hans Kunnen, of Colonial First State, Australian investors will be free to concentrate on the outlook for their own market – which he describes as "pretty good".

"The economy is growing – whether it's growing by 2 per cent, 3 per cent or 4 per cent, it's still growing – and interest rates are near their historic lows," he says.

"The market is near its historic P/E average; corporate earnings growth prospects are good; banks make up 25 per cent of the market, and their balance sheets are in far better shape than they were after the last major slump; we've had only a small number of corporate scandals and any problem we have with executive share options is minuscule compared to the US.

"If the US market fell over a cliff, ours would follow, but it would bounce back pretty quickly, because it would be a bargain."

Rocks believes the best sector of the Australian share market to be in to enjoy the inevitable recovery will be the non-residential construction and infrastructure sector.

"We see quite a bit of pent-up activity kicking off there," he says.

"That means the steel, resources and building materials stocks will all do well, as will Leighton on the engineering side."

On a stock-specific basis, he predicts a bounce-back in the high P/E category, with retailer Harvey Norman a "stand-out".

Dean Fergie, the investment director at Melbourne-based boutique investment manager Opis Capital, believes that the recovery will be very stock-specific.

"The high P/E 'growth' stocks have been absolutely hammered, and I think a fair bit of the early investor attention will be snooping around them," Fergie says.

"The likes of Macquarie Bank, Perpetual Trustees, Computershare, ResMed, Cochlear and CSL have been pummelled for quite a while now. It's interesting that some of them have been slashed in half, and while I wouldn't suggest that they're heading back to their old P/Es, there certainly appears to be some value there."

Stuart Kelly, private client adviser at Joseph Palmer & Sons in Sydney, keeps an eye on brokers' lists of stocks that have fallen to the point where they represent good value at current levels.

He gives the following as examples:

JB Were: Woolworths, Patrick, Wesfarmers, Origin Energy, Westfield Holdings, Billabong, Aristocrat Leisure, Amcor, Coca-Cola Amatil, Rio Tinto, BHP Billiton, WMC, AMP and News Corporation.

ABN AMRO Morgans: Qantas, Leighton, Orica, Wesfarmers, James Hardie, Amcor, Boral, PaperlinX, Futuris, CSR and Ansell.

Shaw Stockbroking: Amcor, Toll Holdings, Metcash Trading, BRL Hardy and Aristocrat Leisure.

And his own favourites: Miller's Retail,Brazin and Sons of Gwalia, all of which "you would buy for the P/E and the dividend yield".

The Australian



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