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Analyst report
Double digit returns likely in 2008
December 10, 2007
Brendon Lau, ShareAnalysis
Investors have every right to feel anxious these days. Despite the decent share market bounce late last week, doomsayers have been dominating headlines on the possibility of a US recession. However, we believe it is still too early for investors to bail out.
In fact, we are still forecasting decent double-digit returns for our stock universe. This is largely driven by continuing strength in our economy, featured by strong employment, business investment and consumer confidence. Do not expect it to be a smooth ride though, as global investors will be overturning every stone to look for signs on how the wobbling US economy will impact the rest of the world.
However, there are no indications that a slowdown (or even a mild recession) in the US would bring global growth to a crashing halt. Furthermore, Asia Pacific is regarded to be in the best position to weather the mortgage and credit crisis, and Australia will be increasingly seen by the global investment community as the best way to gain exposure to the boom in Asia, particularly China. This is because investing in emerging economies is relatively riskier for international investors.
Instead, these investors may rather invest in economies with well-developed financial markets that are leveraged to the Chinese boom. Since Japan has failed to live up to expectations and Canada (another big minerals exporter) is too dependant on the US economy, more international investment flows could head towards our shores.
On the M&A front, the credit crisis is unlikely to bring such activities to a crashing halt. Sovereign (government-backed) funds, flushed with cash, are likely to continue hunting for quality global assets. This is on top of cashed-up companies seeking new growth options (US/EU firms) or seeking to cement strategic links (Chinese firms). Sectors that could benefit from such activities include mining, infrastructure and highly competitive sectors that have underperformed due to the lack of market power by dominant players (paper, packaging, food and beverage).
The expected appreciation of the Australian dollar could also increase the appeal of local assets to international investors in the short term, as this reduces the chance that an adverse currency movement would negatively impact returns down the line.
In the meantime, continuing strong fund flows into Superannuation from a fully employed economy and recent changes to Superannuation laws will help support our market, as the FY08 PE for the ASX 200 is trading below long-term averages.
Our strong economy is a boon to stocks exposed to discretionary spending. While most stocks in this sector have run-up in anticipation, one area with room for growth is Media. This sector will not only benefit from the flow-on effects of increased discretionary spending, but also from the yet-to-be fully realised potential of new media and further operational efficiencies.
There are also opportunities for growth in the Financials sector, considering how some stocks in this space have been hammered on sentiment. There is only an indirect link between Australian financial institutions and the sub-prime fallout (e.g., higher wholesale funding spreads).
If negative investor sentiment were to persist for longer than expected, high-yielding stocks with defensible businesses, sustainable cash flows and relatively low debt levels will likely to find favour due to safe haven buying.
Of the several stocks leveraged to economic growth in the Asia Pacific with our buy recommendation, we highlight two that might be of particular interest to investors.
Stock: Aust Worldwide
ASX code: AWE
Current price (30/11/07): $3.36
12-month forecast: $3.90
Aust Worldwide (AWE) had declined after the failure of this year's drilling program in offshore New Zealand. The approval of the Henry gas field and the recent 30% upgrade of reserves at Tui have been good news for AWE, and the share price has responded. Exploration in Indonesia in 4Q07, if successful, may provide further gains. We maintain our buy recommendation on AWE with a 12-month price target of $3.90 (Technical recommendation: Long-term BUY).
Stock: Valad Property Group
ASX code: VPG
Current price (30/11/07): $1.605
12-month forecast: $2.15
Valad Property Group (VPG) announced a number of transactions. In New Zealand, VPG has purchased four self-storage sites with its joint venture with Kennards Self Storage. VPG separately acquired two other North Island self-storage sites. In Australia, VPG made a series of investments in residential, industrial and office properties in VIC, NSW and QLD. VPG’s recent share price weakness is related to worries about its UK acquisition. Nonetheless, we are comfortable with our BUY call on VPG and note that the stock has a dividend yield of close to 8%. Our 12-month price target on VPG is $2.15 (Technical recommendation: Speculative BUY).
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
More articles from this edition of CompareShares:
Traders’ Choice Awards: Traders & investors decide the top spots
CFDs: Battle of the CFD providers
Stocks: Double digit returns likely in 2008
Trading: The ultimate guide to trading shares for beginners - part 5
Stocks: Stock of the Week: Saferoad Holdings
Smart Investing: Investors have reason to celebrate Reserve Bank transparency
Markets: Australian economy steaming along nicely despite US sub-prime crisis
Trading: Top Ten CFD stocks for the week
Stocks: Stock to watch: Greencross
Companies: BHP takeover bid 'dead': Rio Tinto CEO
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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