Markets predicted to dip in 2007

With economic uncertainty in global markets, there will be buying opportunities as stock markets dip, according to Bell Potter director of research, Peter Quinton.

He is predicting a dip in markets next year, but not a 1987-style crash, before the markets pick up again later in the year.

“If the slowdown in the global economy is small, it will mean there will be volatility, so there will be a dip,” he said.

“This will be a good time for investors to buy again before the upswing.”

Quinton said the last dip, in early May to mid-June, was due to investor fears over high inflation in key economies around the globe and slower economic growth.

“We believe the fear of a hard landing and rising inflation are exaggerated, but they are likely to linger and result in a period of investor unrest,” he said.

“Investors waiting for perfect clarity before increasing their equity exposure are probably going to wait too long.”

Bell Potter are predicting returns of 11 per cent from the Australian stock market next year, which would consist of up to 6 per cent capital gain and 5 per cent dividend yield.

This means high yielding value stocks, such as the banks, will still need to be in investor’s portfolios to generate the yield component of the return.

However, Quinton said growth stocks would be the star performers in 2007.

“Growth stocks should start to outperform value stocks because of the longer term sustainable profit growth and profit resilience in light of potential profit downgrades,” he said.

Stocks tipped by Bell Potter as buys in 2007 include CSL, Toll, Brambles, Metcash, Allco, Tattersall’s and United Group.

The broker favours ANZ, Commonwealth and Westpac as bank stocks that could provide the dividend yield in 2007.

However, the boom in takeovers and mergers could provide some additional fillip for investors in 2007.

Bell Potter identified 10 possible takeover targets, and some have already fallen or are involved in talks. These include Qantas, PBL, Coles and Seven Network.

However, the other targets include Fosters, Rio Tinto, Woolworths, Tabcorp and Macquarie Infrastructure Trust.

There are also targets in the small and mid-cap market, including Zinifex, Alumina, Orica, Computershare and John Fairfax.

But Quinton said some, such as Rio, are unlikely to fall, but he predicts private equity companies have another five years before problems due to the high levels of debt in these vehicles arise.