Pessimism growing in equities markets ::

Date: 24/06/2008
Publication: ABC News

There are increasing signs of pessimism about the longer term outlook for equities with high oil prices, rising interest rates and a slowing economy taking their toll on the market.

The ASX200 has fallen by 17 per cent since the start of the year, with consumer discretionary stocks the hardest hit.

High oil prices, rising interest rates and a slowing economy are all taking their toll on the market, which has resumed its downward slide after a pick up in April and May.

The market may have lost only a handful of points yesterday, but behind that number were signs that an end to the volatility of the past year is going to be a long time coming.

Hans Kunnen is head of investment research at funds manager Colonial First State. He believes the situation on the stock market today is very different to when it first began falling last year.

"People are shell shocked by petrol and by interest rates," he said.

"The expectation of economic growth is a lot lower than it was initially back then so, the market has sort of built in a lot of bad news and worked out well, what is real and what is not real."

What is real is that many people share the view that the market will not recover soon, something that has been reflected in the share prices of companies who earn their incomes investing in the market.

Perpetual was the biggest loser yesterday, down 10 per cent, with other listed fund managers also suffering big losses. For the year to date it has been a tale of woe.

Perpetual was down 35 per cent, while Challenger has lost well over half its value.

Clime Capital Chief Roger Montgomery has no doubt why.

"All the ducks are lining up to suggest that we're in a period where you are much better off being in cash," he said.

"You're going to get 8 per cent for your cash. There's no reason to rush out and find good value today. It will appear. But eight-and-a-bit per cent on your cash for very little risk may in fact look very attractive in the next six to 12 months."

With interest rates so high, it is no surprise that interest rate sensitive stocks such as banks have been hit hard this year - with all four of the majors taking big hits.

Companies which have built their business on the back of low interest rates and heavy borrowing are also being re-rated downwards, with the infrastructure sector in particular in the spotlight, as Transurban becomes the latest to admit that the model, for now, is broken.

Mr Montgomery believes investors need to look very carefully at where dividend payments in the infrastructure sector are coming from.

"If they're paid out of borrowings they need to be very, very careful, because interest rates could go up a lot higher, and more importantly, many of the models that are paying for these dividends are simply unsustainable. You can't use borrowed money," he said.

"While the high price of oil has seen oil producers defy the downward trend on the market, with shares in Santos jumping nearly 50 per cent helped by also producing much in demand natural gas, big oil users have been hammered, with Virgin Blue down by nearly three quarters this year.

Toll Holdings has shed nearly half its value. But oil has the potential to affect company profits in all sectors through higher distribution costs, something ANZ Bank senior economist Julie Toth says the bank has been quantifying.

"Just in the supermarket and food and groceries sector, which of course affects everybody, that's translating into a 20 per cent increase in distribution costs right across the board," she said.

Which is one reason why Woolworths has not escaped blood-letting on the market. Less surprising is that the combination of higher interest rates and high petrol prices is hitting retailers reliant on discretionary spending, with the consumer discretionary sector the hardest hit on the market this year.

With the end of the financial year just a few days away, superannuation funds are shaping up for their first 12-month loss in six years.

But Jeff Bresnahan who runs ratings agency Superratings says investors need to take a long term view.

"Let's look at the five year numbers. They're up 11 per cent per annum, compound over the last five years," he said.

"That in anyone's mind is a good result and it's actually better than the average funds objective, which is basically the CPI plus 3.5 per cent per annum."

The question for many now is where to find value on the stock market.

Mr Kunnen believes sectors such as retailing and banking have been oversold and he says despite interest rates and oil, sharemarket investors should not lose sight of the strength of the Australian economy.

Based on a report by Andrew Roberts for Lateline Business.

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