Monday, March 31, 2008

Australia Stocks Have Worst Quarter in 20 Years as Rates Rise

By Shani Raja and Malcolm Scott

April 1 (Bloomberg) -- Australian stocks fell the most in 20 years during the first quarter after rising interest rates cut demand for bank shares and slowed the economy's 17th year of expansion.

The All Ordinaries Index declined 16 percent in the first three months of the year, the most since the end of 1987, following the October crash. The benchmark S&P/ASX 200 Index, started in 1992, lost 16 percent in its worst quarter on record.

Commonwealth Bank of Australia, the nation's biggest provider of home loans, dropped 29 percent in the first three months as the Reserve Bank of Australia lifted the overnight cash rate target to an 11-year high to stem the fastest inflation since 1991. Higher borrowing costs are weighing on an expansion driven by demand for the nation's iron ore and coal and adding to global concern that credit-market losses will curb financial earnings.

``Australia has been hit on multiple fronts, not only by the global turmoil, but also by higher interest rates,'' said Shane Oliver, Sydney-based head of investment strategy and chief economist at AMP Capital Investors, which manages about $108 billion. ``Australia has a higher-than-average weighting of financials, which have been at the heart of the crisis.''

AMP Capital, which reduced equity holdings in the first quarter in favor of bonds, is starting to buy Australian banks after valuations slumped, Oliver said.

Financial firms in the S&P/ASX 200 trade for 9.8 times reported profit, the cheapest since records began in November 2001. The price-to-earnings multiple for Melbourne-based National Australia Bank Ltd., the nation's biggest by assets, sank to 9.9 times earnings in March, the lowest since 1996.

Cheaper Shares

The S&P/ASX 200 is valued at 13.8 times estimated earnings, about 21 percent below its five-year average, and down from a high of 24.9 times in December 2004.

The declines in Australian stocks compare with a 10 percent drop this year in the Standard & Poor's 500 Index, the benchmark for American equities, and the MSCI World Index's 9.7 percent retreat. Australia's All Ordinaries index also dropped more in the fourth quarter of 1987, losing 41 percent compared with a 23 percent decline in the S&P 500.

The 49-member S&P/ASX 200 Finance Index has slumped 23 percent this year, the worst-performing group. Financial stocks make up 37 percent of the S&P/ASX 200 by weighting, compared with 17 percent in the S&P 500.

Allco, Centro Plunge

Allco Finance Group Ltd., the Sydney-based asset manager that breached loan obligations, plunged the most in the S&P/ASX 200, sinking 92 percent to 48 Australian cents. Centro Properties Ltd., the Australian property trust seeking to refinance A$4.9 billion ($4.5 billion) of debt, lost 70 percent, the third- biggest decline.

Commonwealth posted its worst quarterly decline since the Sydney-based bank sold shares to the public in 1991. The Reserve Bank, headed by Governor Glenn Stevens, raised the benchmark rate by a quarter percentage point four times since August to cool core inflation, which accelerated to 3.8 percent in the fourth quarter. Stevens boosted interest rates to 7.25 percent as the U.S., Canada and the U.K. cut borrowing costs to revive growth.

Australia's $1 trillion economy grew at the slowest pace in more than a year in the fourth quarter compared with the previous three months as construction declined and bottlenecks at ports cut shipments. Gross domestic product rose 0.6 percent from the third quarter and 3.9 percent from a year earlier. The annual rate dropped from 4.3 percent in the third quarter.

Nearing Bottom

The market may be nearing its bottom, Paul Brunker, JPMorgan Chase & Co.'s Sydney-based strategist for Australia, wrote in a March 31 report. Financial shares led the S&P/ASX 200's 5.3 percent rebound from a 17-month low set March 18. Raw-material companies were the only industry out of 10 that declined during that period.

``In terms of the speed of the correction, we've probably seen the largest part of it,'' said Troy Angus, who helps oversee A$3.6 billion at Paradice Investment Management in Sydney. ``In the last week or two we've been buying financials. Some of them were very beaten up, and we considered them to have attractive valuations.''

Michael Birch, who helps manage the equivalent of $140 million at Wallace Funds Management in Sydney, expects demand for oil and metals will help commodities companies.

Melbourne-based BHP Billiton Ltd., the world's largest mining company, has a P/E of 14.3. That's 21 percent less than the valuation for raw-materials companies in the S&P 500.

While all of the S&P/ASX 200 Index's 10 groups have dropped this year, measures of energy and materials shares have done better, declining 4.6 percent and 6.7 percent, respectively. The three biggest gainers, topped by Felix Resources Ltd., are coal- mining companies benefiting from record prices for the fuel.

``We think resources stocks have pretty good underlying fundamentals and should continue to perform well over this year,'' he said.

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