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A battered stock market provides the foundation to build a long-term share portfolio, according to economists and analysts. Investors prepared to take calculated risk now may well herald 2009 as the year of opportunity.

The premise is quality stocks – so much cheaper than a year ago – will recover strongly on signs of an improving global economy. Few, if any, are expecting a quick economic fix, but infrastructure programs, lower taxes and interest rates, thawing credit markets and more government stimulus should at least stabilise the global economy in 2009, while preparing it for recovery.

Analysts say the major banks should be part of any long-term share portfolio. At today’s price levels, they can be bought for dividend yield (8-to-10 per cent) alone, as the returns are far more attractive than interest generated on bank deposits.

Mark Goulopoulos, of Tolhust, prefers Westpac, saying it’s trading on a forecast price/earnings of just nine times, which is cheap on an historical basis. Westpac appears to have minimal exposure to overseas bad debts, leaving its balance sheet and tier 1 capital in relatively good shape. The St George acquisition makes Westpac the nation’s biggest bank, and a combined deposit base is even more appealing in tight credit markets.

But Goulopoulos expects all the major banks to benefit from industry consolidation as they gobble up smaller players, such as Commonwealth Bank’s acquisition of BankWest. Aussie Home Loans recently bought Wizard, yet 30 per cent of Aussie was last year sold to the Commonwealth Bank. Goulopoulos says more than $20 billion has collectively flowed to the major banks from other financial institutions and managed funds after the Federal Government last year guaranteed deposits of up to $1 million.

“It’s just another reason to buy the banks,” he says.

Goulopoulos says he expects gold stocks Newcrest Mining and Lihir Gold to perform well in a sector that generally benefits from global turmoil and a weak US dollar and economy. Newcrest, his preferred choice, has little debt and appeals to “safe haven” investors. A strong balance sheet makes Australia’s biggest gold producer a solid long-term buy.

The enviable performance of retail giant Woolworths in a slowing economy paints an attractive outlook for the company when the economy improves, according to Scott Marshall, of Shaw Stockbroking. The company’s defensive and growth fundamentals make Woolworths a stock for all seasons. Marshall is emphatic. “All stocks carry a degree of risk, but in today’s market, Woolworths is as safe as any stock can be,” he says. “Strong management continues to invest in store growth and logistics capability. In my view, it’s four years ahead of Coles.” Marshall says Woolworths generates lots of cash from its diverse operations, which also include liquor outlets, electronics and hotels. Woolworths continues to circle the Warehouse Group in New Zealand, which, if acquired, would add 3 per cent to group sales.

Marshall says Telstra’s a long-term prospect, as it will continue to generate billions of dollars in free cash flow from its high-speed broadband networks. He believes Telstra’s exclusion from the National Broadband Network process and possibly building the infrastructure will only have a minor impact on performance, as Foxtel broadband already covers the major markets of Sydney and Melbourne.

“Telstra has enough options up its sleeve,” Marshall says. “However, I do believe Telstra will probably end up building the NBN, as it’s the most logical choice in terms of capital and capability. If it doesn’t build it, a potential price war could make things very tough for Telstra’s competitor.” Marshall says the risk to Telstra is enforced separation of its retailing and wholesale operations.

CommSec economist Savanth Sebastian says an Australian sharemarket trading on its lowest price/earnings in 28 years suggests long-term buying opportunities exist in over-sold stocks. Apart from recommending the banks, he believes Leighton Holdings should perform well, as governments across the world spend big money on infrastructure projects in a bid to stimulate economies and protect employment. Leighton will generate big revenue from an order book extending to 2011. “Leighton continues to bid for and win big international projects as it diversifies its client base,” Sebastian says.

Australia’s coal seam gas sector will continue to attract overseas interest in the wake of last year’s takeover of Queensland Gas by British energy giant BG Group. Sebastian holds high hopes for Origin Energy’s joint venture with ConocoPhillips to process coal seam gas into liquefied natural gas. Origin received US$5billion from ConocoPhillips to form the joint venture, Australia Pacific LNG. Sebastian says strong overseas demand for LNG paints a bright outlook for the joint venture. “Europe and Asia’s LNG markets are massive,” Sebastian says. Origin Energy retains strong valuation support and offers superior earnings per share growth compared to other stocks in the sector.

National Australia Bank economist Jeff Oughton is cautious about investing in the sharemarket, citing a highly uncertain outlook for the global economy. He says the world is in the process of still “trying to save itself” and the performance of shares will depend on the effectiveness of global stimulus packages. Stimulus should be squarely aimed at infrastructure projects and getting consumers to spend as opposed to tax cuts for the rich, he says. Australian investors should factor in lower interest rates and higher unemployment in a slowing economy before buying stocks.

Oughton says investors prepared to take risk should stick to buying blue chip stocks – “the old fashioned stuff”. “And remain diversified,” he advises. “The sharemarket can pick up 5 per cent this year.”

Michael Heffernan, of Austock, says astute investors will pick up bargains in this market and they will be vindicated when looking back in two years’ time. Today’s market is more than 40 per cent cheaper than last year, so there’s good value among the blue chips to build a long term portfolio.

“I like all the big stuff,” Heffernan says, suggesting a portfolio consisting of banks, BHP Billiton, Newcrest Mining and Woodside Petroleum. Grocery stock Metcash can also be included as a defensive play.

Heffernan says Metcash is partially shielded from a weaker economy through its IGA supermarket chain, in much the same way as Woolworths. “Consumer staples are good stocks to hold in challenging times,” Heffernan says. Metcash is expected to grow earnings per share by 12 per cent in 2008/09 and 10 per cent the following year, according to consensus forecasts.

He expects strong Asian demand for LNG to benefit Woodside Petroleum as will an improving oil price. “LNG is the fuel of the future and Woodside will continue to be a leading global producer,” he says. “Crude oil will recover in line with the global economy.”

So why is Heffernan optimistic about 2009? “The sharemarket will eventually respond to so much stimulus being blasted at the economy,” he says. “It might not happen in the first six months, but expect at least a partial recovery in the second half. But astute investors will be rewarded longer term.”

StockJan high 2008Jan 15 2009 closing price

Westpac

$28.19

$16.16

Woolworths

$34.50

$26.26

Newcrest Mining

$39.75

$28.25

Commonwealth Bank

$59.50

$27.31

NAB

$37.94

$19.60

BHP

$41.00

$28.90

ANZ

$27.49

$14.57

Lihir Gold

$4.12

$2.55

Telstra

$4.76

$3.61

Woodside Petroleum

$52.40

$34.05

Origin Energy

$8.91

$15.28

Metcash

$4.43

$4.20