Investors can rest easy

Press, 24 April 1986, Page 26

Investors can rest easy

By

BRUCE HEXTALL

AAP Correspondent NZPA Sydney Investors flabbergasted at soaring share prices and waiting for a major collapse can rest easy. That’s the word from one of Australia’s largest independent fund managers, Equitilink. The drop in world oil prices and lower inflation will provide the fuel to sustain the current push on world sharemarkets, says the Equitilink joint managing director, Mr Laurence Freedman. Mr Freedman says these two factors are new fundamentals influencing the current economic and market situation. “The falling oil prices will continue to have a significant positive impact on almost every facet of the major western economies,” Mr Freedman told AAP. “Costs are falling dramatically, as oil is an important input in nearly every major industry.” As well, Mr Freedman says, high inflation, which has been a negative influence on stockmarkets for nearly 20 years, is no longer with us. “It is going to take quite some time for most people to adjust their thinking to a substantially different set of basic as-

sumptions on which to determine whether or not investment markets represent sound or unsound value at current levels. “Back in the 1950 s and 1960 s when western world inflation was steady at around three per cent, investment managers would tend to be buyers of shares selling around 15 times expected earnings, and be sellers when the price-earning ratio of a stock approached 20 times expected earnings.” Mr Freedman says the market is selling at around ten times expected earnings at present, which means there is considerable potential for share prices to go higher, given the new factors of lower oil prices and reduced inflation. He says although analysts have not to be overly optimistic in forecasting next year’s company earnings, Equitilink’s own research, based on low inflation and a continuing fall in interest rates, points to a strong re-stimulation of economic growth around the world. “This is likely to translate into strongly higher company earnings over the next two years,” Mr Freedman said. He says higher profits will combine with a reassessment of the net asset

backing of companies to provide a strong reason for investors to bid share prices up. “Historically directors have been conservative in revaluing the assets of their companies, especially during years of high inflation when values rose considerably. “The result is that many shares are still selling at large discounts to their real asset value, hence the enormous amount of take-over activity now taking place.” Mr Freedman believes that with many company boards nervously looking over their shoulders waiting for a takeover bid, a good defensive stance would be for directors to revalue company assets to more realistic levels. He says the dual result of such action will be that companies will be less attractive to take-over raiders and the share prices will rise to reflect their revalued asset backing. As well, acceptance of recent take-over offers by investment fund managers has left them with even greater amounts of cash to reinvest at a time when quality scrip is becoming more scarce. In Australia, investors have been reluctant to sell blue chip shares ac-

quired before the introduction of a new capital gains tax on assets acquired after September 20, 1985, creating a shortage of scrip at a time when the market has been flush with funds. Mr Freedman says this has resulted in fund managers being more than willing to aggressively buy quality shares. “In fact, they are being increasingly forced to do so because no one wants to be under-exposed in a rising market.” Mr Freedman sees few dangers in investing in Australian stocks, apart from factors which continue to put a cloud over the world economy, such as the third-World debt problem and the threat of a major world crisis. ' “Factors such as these are always about, but there are a lot of positive factors as well,” he says. He says the bullish factors now influencing sharemarkets point to very strong . rises in world stock prices during the next 12 to 24 months, and sees no reason why Australian stocks should not participate in the rise. Mr Freedman’s bullishness was backed up by the Westpac Banking Corporation in the April edition of the bank’s investment quarterly. Westpac said the “bulls” were arguing that the disinflation, or low inflation, forces are so powerful that econo-

mic activity and corporate profits could improve substantially without any necessary pressure on inflation or interest rates. And while the bulls talk up the market, Westpac says the “bears”, except for the natural Jeremiahs, are fairly quiet. Westpac says that under normal circumstances corrections of as much as 10 per cent would be well within market bounds but the benefits flowing from lower oil prices and falling interest rates mean that many market commentators are now looking at the next "big number” for sharemarket indices. “For example, 2000 on the New York Dow but why not 2500 or 3000, if not this year, then certainly next.” On the Australian scene, Westpac points out that industrial stocks are still not regarded as expensive by international investors. For example, the bank says, these investors have recognised that price-earn-ings ratios for Australian banks are low, and a rerating process is under way. After a 38 per cent rise in 1985, Australian shares have continued to sparkle in 1986 with the Australian Associated Stock Exchanges’ allordinaries index advancing a further 13 per cent in the March quarter.