It’s a stock picker’s 2005

Good stockpicking will be more obviously rewarded in 2005 than it was during the blanket gains of the Australian equity market this year, according to Tyndall Investment Management.

Tyndall’s head of Australian equities research, Warwick Cumming, stopped short of giving an actual performance forecast following last year’s decade-high 28 per cent return for the ASX 200, saying it was not integral to Tyndall’s bottom-up value process, but he was upbeat about the market’s continuing moderate price/earnings ratio of around 15, as well as ample demand from investors and “benign” economic conditions.

Cumming still identified three major risks to Australian share performance.

The first was the “unsustainably” high level of commodity prices, which Cumming said would inevitably dampen demand even if Chinese economic growth continued apace, with metal and steel stocks lacking volume capacity to be most adversely affected.

The second risk was historically high levels of Australian household debt, 141 per cent of household income compared with 52 per cent before the 1988-90 recession, at a time where interest rate rises are almost certain.

Tyndall’s head of fixed interest, Ross Gustafson, said the Reserve Bank was more restrained than it would like to be in raising rates because of this household debt burden, but Australia’s big trade deficit would still see the cash rate rise as high as 5.75 per cent over 2005.

Cummings’ third risk was late-cycle frothiness around corporate actions. High levels of profit, low transaction funding costs and a recent patch of responsible behaviour characterised by buy-backs and better dividends were all building toward a big year for takeovers, the researcher predicted.

“Following the uncontested bid for MIM, the market has lamented letting it go too cheaply. It has developed a taste for the rich rewards of uncontested bids and expects high prices, it wants bold actions like Metcash’s bid for Foodland. Chief executives want to be remembered as visionaries and company makers, not the guy who gave all the money back,” Cumming said.

The market was reacting aggressively to any takeover rumour, Cumming said, which would inevitably produce costly mistakes.