Finding the right resources

The upgrading of resource stocks will determine the performance of the Australian stock market in 2006, according to Portfolio Partners head of equities Glen Hart.

“What happens to the stock market depends on the upgrades of various companies, especially in the resources sector,” he says.

“Some industrial companies are extremely attractive, with positive EPS [earnings per share] growth predicted.”

However, how these companies perform depends on the strength of the Australian economy, he adds.

To date, consumer spending and a buoyant local economy have helped to provide positive earnings growth for industrial stocks, but there is a question mark about how long this can be sustained.

“We are seeing some industrials downgraded and it does raise questions about the quality of some issues,” Hart says.

“Some downgrades are due to rising costs, such as raw materials, and although the economy is strong some companies are not getting price rises for their products to cover costs.”

The small caps sector remains gloomy with very little value to be had, according to Hart.

“The Australian market looks expensive as a lot of good news has already been factored in.”

Distributions are way above operating costs on many stocks, but there is still some limited growth in the market.

Interest rates also remain a concern and any rises will have an impact on some sectors of the market.

One sector that could be hit is the listed property trust market, which under-performed in 2005. Hart says the flood of new issues has not helped the sector and he sees little growth in 2006.

“There are still earnings risks in the sector, which makes it volatile,” he says.

“If interest rates go up the sector will take a hit, so there is not much to excite.”

But if some industrials and property trusts cause concern, the banks are still a safe haven.

However, earnings still need to be supported by low provisions of bad debts, Hart says.