Blue-chips emerge as a good buy

The fall in the value of blue-chip stocks, now at a two-year low, is creating good buying opportunities for investors, says Portfolio Partners joint managing director Keith Ince.

The fall in the value of blue-chip stocks, now at a two-year low, is creating good buying opportunities for investors, says Portfolio Partners joint managing director Keith Ince.

The fall in value is because anything that is not a technology stock is out of favour with global managers, he says. Some blue-chip stocks, however, retain good fundamentals.

“Consumer demand is strong, stronger than the supply of manufactured goods,” Ince says. “But why aren’t the prices for these stocks going up?”

“The Asian crisis produced a surplus of manufactured goods and this has made the marketplace very competitive.”

Blue-chip stocks are also operating in a more stable economy than in 1987, the scene of the last meteoric rise in the Australian stock market.

Ince says this year Australia is seeing strong economic growth, controlled inflation and improvements in productivity due to the use of more technology.

The Reserve Bank has been keeping the lid on inflation with a number of rate rises. Ince does not rule out another rise this year as part of that control measure.

“Despite interest rate rises, the big driver in the economy is the individual investors in the US through the mutual funds,” he says.

The mutual funds have been pumping more and more money into the US equity markets and that has been pushing the markets higher, especially the Nasdaq index which achieved an 86 per cent gain last year.

“This is happening in Australia,” Ince says. “We are at the start of a period of intensive growth in the retail market.”

“However, if interest rates go too high, the sharemarket may crash and a lot of people will lose their money.”

He warns that sharemarkets that enjoy period of rapid growth tend to crash dramatically, if historical data is to be believed.

Ince cites the Nikki which reached 39,000 points in the heady days of the eighties. Today it is trading around the 19,000 points level.

“The Nasdaq index is hitting those sorts of levels so the question is how long will it last?” It is a question, like many other fund managers, that Ince declines to answer.