State Street predicts ‘more normal’ year ahead for Aussie shares

International institutional investors remain overweight to Asia but have tended to take their profits from emerging markets, according to State Street Global Advisors (SSgA). Lochiel Crafter, chief investment officer for SSgA in Asia Pacific, said Asia, particularly China, Taiwan and Korea, was seen as a long-term growth opportunity.

In its annual review of global markets for clients, SSgA said: “We believe earnings growth rates for many Asian companies, despite recent downgrades, will increase next year over 2005 levels based on the strength of the global economy and its anticipated growth at or above trend.” However, profit-taking among emerging markets was notable for India, after its recent strong run, the report said. “With projected earnings growth rates for Asia (ex Japan) having been revised down from 12.9 per cent to 11.5 per cent and now 10.9 per cent, and valuations near their historic norms, emerging markets investors have reallocated on fears of further downwards revisions eating into their profits late in the year. We expect that investors may become more risk tolerant again in early 2006.” Crafter said after the release of the report that SSgA was expecting “more normal” returns for the Australian share market next year. “The economy has started to slow a little,” he said. “The Reserve Bank has been concerned about growth into next year … The great bulk of earnings growth is made up of commodities. It’s a very narrow base for growth,” he said. SSgA is anticipating growth of 8-9 per cent for the Australian market, but resources stocks are expected to contribute more than 50 per cent of earnings growth. “For Australia, we’re cautionary rather than alarmist,” he said. On China, the report says: “Macro control measures in China have cooled activity in its property markets, which have shown significant gains in major cities in recent years. “We believe the Chinese economy will slow marginally this year into next but expect it will maintain growth at an 8-9 per cent rate. “Reforms of the A-share market should ultimately improve investor confidence and help in the ongoing development of a vibrant capital market in China that will help ‘self-finance’ a greater proportion of the investment required to sustain such growth rates. “At a company level, managements have reduced debt and improved balance sheets, making current corporate performance more sustainable. “While rising interest rates and underperforming property stocks have weakened the performance of the Hong Kong stock market, we believe earnings growth rates for many Asian companies, despite recent downgrades, will increase next year over 2005 levels based on the strength of the global economy and its anticipated growth at or above trend.”