The stock market will be less volatile next year as company earnings recover and firms get back to business as normal after the turmoil of the GFC.  Analysts are tipping the banks, BHP and Rio Tinto plus gold miners as promising stocks, and say it will be an environment that favours stock pickers rather than investors targeting particular sectors or only blue chip stocks.  

Although market experts expect the All Ordinaries to end 2010 higher, they warn that the higher Australian dollar and uncertainty on the US economy will be continuing themes that undermine confidence and earnings forecasts.

UBS strategist David Cassidy expects the ASX 200 to be around 5300 by the end of 2010.   Cassidy likes BHP and Rio Tinto for their exposure to bulk commodities such as iron ore and coal.  He says the US economy poses the biggest risk to markets but China will be a source of support to Australia.  Although Cassidy notes the higher Aussie dollar will eat into the profits of some companies “it reflects the good fundamentals of the Australian economy, so is positive when seen in a big picture sense.”

While some investors are starting to consider banks expensive, Cassidy does not consider them overvalued either in the near term or further out when earnings have improved.  “Their earnings are in the early stages of recovery.  Banks will generate good earnings growth on a two-year view,” he says.

Bell Direct equities analyst Julia Lee says 2010 could be even stronger than this year, with cyclical growth sectors outperforming.

“At the rate we are going, mid way through the year I would be looking at 5500 – 5600 (for the All Ords), and by the end of the year 5800,” she says.

Lee says energy is her favorite sector and utilities in particular have not had much of a recovery in share prices and are valued conservatively.  She likes Woodside (WPL) in energy and also BHP and Rio Tinto.  Lee also expects gold miners to continue their upward run in 2010.  

BGF Equities analyst Warwick Grigor forecast gold’s rise this year and says the metal will continue to shine in 2010 on its unique qualities as a currency and store of value.  

Grigor sees the gold price reaching around US$1500 an ounce next year and the stock market behaving more normally.  “It will be more of a stock selector’s market.   That will be the dominant theme in 2010.”

He sees a quieter, more orderly year and will be surprised if the market is higher than 5000 mid-year.  He believes it could have recovered to 5500 by the end of the year.

Although gold is at historic highs, it has not had the wild gyrations of previous booms and Grigor sees this as a quite deliberate policy of central banks which he says are allowing an orderly appreciation to prevent speculators from destabilising the market.

“The gold price has been incredibly well behaved in the last few months because we are seeing a dirty float of gold,” he says.  “If gold moves 1 percent in a day that a big movement, but copper and nickel can often move 3-5 percent in a day.”

Grigor is less positive about industrial metals, because there are still plenty of stockpiles, but says copper has the most favorable fundamentals of all of them.

Among gold stocks, Perseus (PRU) remains a favorite pick and he says Lihir (LGL) is still good value.  Grigor also likes Saracen (SAR), a new producer coming on stream from Western Australia at the end of January.

“I do prefer new situations coming through because they offer growth other than just exposure to the gold price.”

Boutique fund manager Fairview Equity Partners is looking for outperformance from the small companies in which it specialises.   Executive director Leigh Cronin has noted a more encouraging outlook coming from annual meeting commentary, pointing to a broad-based recovery that is encouraging in terms of earnings and operations.

“The market will very soon start to think about 2011 and on that basis the small ordinaries is trading on 11 times 2011 earnings.  A more normal rating is somewhere between 13 and 15 times and we also think earnings expectations are more likely to be upgraded than downgraded.”

Cronin says small companies tend to be more leveraged to the real economy and are less likely to be represented in defensive sectors.  Although he sees media, residential housing, IT servicing and some retailers as areas that will benefit in the recovery, he says investing in smaller companies will be more about picking the right stocks than a particular sector.  

Fairview likes consumer products and printing group McPherson’s (MCP), Retail Food Group (RFG), IT services company Oakton (OKN), information services and risk management provider SAI Global (SAI) for its leverage to the increase in regulation and Campbell Brothers(CPB) which does laboratory testing for minerals so will benefit from increased activity in the resources industry.  Cronin likes APN News and Media (APN) but is avoiding property trusts.  Although many of trusts have repaired balance sheets that were overloaded with debt, he says the risk has moved to re-ratings of commercial property.

Bell’s Julia Lee says Australian companies with offshore earnings will find the year hard as the higher local dollar eats into earnings and this is holding back companies such as QBE and Billabong.

Although markets will be focused on the performance of the US economy in 2010, Lee points out that banks and materials account for about 65 per cent of the Australian share market and their actual operations do not rise and fall on activity in the US, with miners’ fortunes are tied to China and the banks mostly to domestic demand.  Like Cassidy of UBS, she still likes the big four banks despite their share price recovery this year.


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