Australian equities to deliver again in 2007

The Australian equities market will continue to produce strong returns over the next 12 months on the back of sustained economic growth fuelled by infrastructure projects and solid corporate earnings, according to the head of research of a major financial institution.

Speaking at a recent Asgard Adviser Briefing, ColonialFirstState head of investment markets research Hans Kunnen said: “Think of the infrastructure that is being built around the country. It’s gi-normous. There’re all sorts of things going on.”

“For example Victoria has $1 billion of wind farms. That is a lot of building that needs to be done and they have to employ people to do it,” he explained.

Kunnen believes fears that the domestic share market will slow because the level of growth it is experiencing now is comparable to that of the late 1980s are unwarranted.

“Growth in that period before the crash was far more rapid than it has been recently,” he said.

The current strength of corporate earnings is also causing Kunnen to be upbeat about the prospects for the local equities market in the immediate future.

“What does the share market depend on? The economy and corporate earnings. That’s the relationship between the two,” he said.

According to Kunnen, the robust corporate earnings environment also means domestic price earnings ratios are being kept at reasonable levels suggesting the home market is not overvalued and in need of a correction.

The Colonial First State head of investment markets research feels even if the economy doesn’t continue to grow there is enough cash available for investment to maintain the performance of the local equities market.

“You’ve got this huge amount of cash that’s come out of profits, you’ve got the Future Fund sitting on $40 billion, and you’ve got all of this superannuation money with people realising property assets and moving into the share market,” Kunnen said.

“Last year that demand was absorbed by Telstra but where is it going to go this year? . . . There’s a huge demand for equity but not as much supply and that will support the market even if there was no economic growth,” he explained.