China impact, US caution give Australian equities appeal

Wed Sep 28, 2005 11:42 PM ET

By Wendy Pugh

NEW YORK, Sept 28 (Reuters) - Australian stocks will lure investors despite recent rises because of caution toward U.S. stocks and as China's commodities appetite boosts Australia's resource firms, said fund managers.

Australia's benchmark S&P/ASX 200 index has set a string of record highs, led by the world's top miners BHP Billiton Ltd./Plc. (BHP.AX: Quote, Profile, Research) (BLT.L: Quote, Profile, Research) and Rio Tinto Ltd./Plc. (RIO.L: Quote, Profile, Research) (RIO.AX: Quote, Profile, Research) , which together make up about 15 percent of the index.

Many Australian companies are promoting their investment credentials at annual conferences in Asia, Europe and the United States, including at the Merrill Lynch Australia Investment Conference in New York on Thursday and Friday.

High commodity prices and links between Australian companies and China have made Australian shares attractive despite recent gains, said Ron Holt, managing director at fund manager Hansberger Global Investors, based in Fort Lauderdale, Florida.

"If you believe that commodity prices can be sustained and that global demand can be sustained, it is still a market that you would want to have a pretty good weighting in," he said.

Australian resources companies posted strong earnings in the recently ended reporting season for the six-months ended June 30, as miners operated at full capacity to meet demand fuelled by China's growth, and as commodities prices traded at high levels.

BHP Billiton, the world's largest diversified miner, almost doubled its first-half profit. Its fiscal 2006 profit is forecast by analysts to reach $9 billion, up from $6.5 billion in 2005.

Australia's domestic economy has also been solid, with the Federal Government in its May budget forecasting Australian GDP growth for 2005/06 at three percent, increasing to 3.5 percent for 2006/07.

Michael Cuggino, president of Permanent Portfolio family of funds, based in San Francisco, said Australia was likely to benefit from investors seeking to reduce their weighting in U.S. equities amid caution about the outlook in that market.

"In general people have been looking to diversify away from the U.S. market recently, and Australia has a stable government, a good business climate, and the Australian dollar has picked up in value vis-a-vis the U.S. dollar," he said.

Kevin Skelton, Merrill Lynch Australia country head and chairman of investment banking, said funds were likely to flow into Australian companies from investors seeking gains without the volatility of faster-growing regional markets.

"I think there will be a steady stream, because the companies are in such good shape, but it is most likely it will be a steady stream rather than a deluge," he said.

"The issue for Australia is that the PE multiples are higher than the rest of the world, particularly in the banking sector, but the reality is that they are very well managed, the banks here, and they have much lower loss ratios."

Simon Doyle, head of strategy at Schroder Investment Management Australia, said that while the Australian market benefits from strong commodity prices and the solid Australian domestic economy, risks were rising.

"It is pretty fully priced, but it is not outrageously priced," he said. "The problem is that it does require some fairly good earnings expectations to be delivered."

$1=A$1.32


© Reuters 2005. All Rights Reserved.