The time has come to lock in some profits before the distinct possibility of another sharemarket correction, according to analysts. They suggest selling resource stocks, banks, retailers, building materials, gaming, property trusts, and a mix of disappointing performers before commodity prices fall, Chinese growth slows and interest rates rise. They say Chinese GDP growth of 11.9 per cent in the first quarter of 2010 is simply unsustainable.
Carey Smith, of Alto Capital, suggests reducing holdings in BHP Billiton and Rio Tinto, saying the negotiated iron ore price of US$120 a tonne between April 1 and June 30, 2010, is probably the peak and set to fall. He believes China has been stockpiling steel and will reduce its demand for iron ore as it rationalises its steel mills. “China is going to slow its economy because 11.9 per cent growth for a single quarter is among the highest numbers since they began reporting quarterly figures more than five years ago,” he says. “It’s unsustainable. The Chinese Government is reducing the amount of money their banks can lend to businesses and households. The Chinese Government is cracking down.” As a result, Smith expects commodity prices to fall within the next six months after copper, nickel, lead and zinc made substantial gains in the past 18 months. “I would be treading very cautiously in the resources sector,” he says.
Smith says he would be selling discretionary retailers, JB Hi-Fi, Harvey Norman, David Jones and Myer in response to higher interest rates reducing spending power. Smith expects mortgage rates to rise by another one-percentage point in the next 12 months as the Reserve Bank is committed to keeping a lid on inflation and property prices. “Home loan borrowers can expect to pay an extra $350 a month on an average $300,000 loan if mortgage rates rise by a full percentage point,” Smith says. “Meeting mortgage repayments is the number one priority of most households. Australians will cut back on everything else to pay the mortgage. So as rates rise, there will be less to spend on electrical goods, furniture and clothing.” Smith says he expects bank profit growth to slow in the next two years as higher interest rates cut home loan and business lending. “The major banks have had a terrific run and their share prices, with the possible exception of National Australia Bank, look expensive,” he says. “I would be reducing my exposure to financials because a slowdown in lending will impact profitability. There should be opportunities to buy the banks at cheaper prices. I sold my banking stocks, Westpac and Commonwealth Bank, about two months ago for a tidy profit.”
Mark Goulopoulos, of Patersons Securities, is also a seller of major banks, saying their share prices rose in response to a “perfect storm” of reduced competition, courtesy of the global financial crisis, low interest rates, the first home-buyers grant and the Federal Government funding guarantee involving deposits and wholesale funding . He says the major banks are expensive as they are trading on historically high price/earnings ratios. Stocks trading on high P/E ratios are among the first to be punished in a downturn, he says. Goulopoulos says if major US banks disappoint the market in what is a sluggish US economy, the effects will flow to Australia. “In terms of a bull market rally following a collapse, this latest one is the biggest we’ve seen,” Goulopoulos says. “The ASX 200 is up more than 60 per cent in the past 12 months. The Dow has risen by about 70 per cent. I wouldn’t be surprised to see the market come off by up to 20 per cent within the next six months.” He says he would lighten holdings in BHP Billiton and Rio Tinto for the reasons detailed by Smith, and he would sell building materials stocks, such as James Hardie Industries and Boral, because the US housing market is flat and higher interest rates in Australia are expected to cut building approvals. He sees little point in holding debt-laden Sigma Pharmaceuticals, as a competitive generic drugs market is putting immense pressure on margins. He expects Telstra’s share price to rise within the next few months and suggests investors sell some, or all of their holdings into the rally. Goulopoulos says even if Telstra gets a better-than-expected outcome from its National Broadband Network negotiations, the longer term remains challenging as stiff competition is increasingly leaving Telstra as a “price taker rather than a price maker”. “Telstra’s competitors offer broadband, fixed lines and mobile phones so Telstra can’t differentiate its products,” he says. “Services among the providers are comparable so they compete fiercely on price.”
Analysts say it’s an appropriate time for investors to examine portfolios as the end of the financial year approaches. They say selling stocks for a loss this financial year can reduce capital gains tax on profits. Investors are entitled to a 50 per cent capital gains tax discount on profits provided the shares they sold have been owned for more than 12 months. This may be significant in timing a sale of shares. Goulopoulos says Foster’s Group is another stock investors could consider selling if they are sitting on a loss and want to reduce capital gains tax on profits. Goulopoulos says the global wine glut will continue to weigh on Foster’s profitability, while the company’s once dominant beer operations are losing market share to overseas boutique beers. Goulopoulos says Foster’s has underperformed and it’s outlook is bleak.
Mike Kendall, of JBWere, says Tatts Group, Tabcorp Holdings and Aristocrat Leisure are exposed to governments changing wagering and gaming regulations to raise more tax. He says he would lighten holdings on all three and “certainly wouldn’t be buying them”. “When government budgets are under pressure, gaming and alcohol companies become an easy target for more tax,” Kendall says. He expects a difficult year for property trusts amid a higher interest rate environment squeezing margins in the commercial property sector. “I’m not a buyer and would avoid the sector,” he says. “I would lighten holdings in Mirvac (Group), Stockland and Westfield (Group).”
|COMPANY||CODE||CLOSING PRICE (April 21, 2010)|
|National Australia Bank||NAB||$28.46|
|James Hardie Industries||JHX||$7.25|
|Sigma Pharmaceuticals||SIP||48.5 cents|
Other articles in this week’s newsletter
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