Returns to shrink, says Australian share fund

SYDNEY - Australian fund manager Perpetual Investments expects domestic sharemarket returns to shrink in 2005/2006 fearing the China-led resources boom may fizzle and inflation could re-emerge.

Australia's benchmark S&P/ASX 200 index set a record peak on Tuesday, taking gains to 8 per cent in the 2005/2006 fiscal year so far, after rising 21 per cent last year.

It closed 1.6 points lower at 4627.6 yesterday.

The rally comes in the face of expectations of lower earnings growth as the world's 13th-biggest economy slows after 14 years of expansion.

"We are finding it difficult to find value, both in relative and absolute terms. Hence we expect returns to moderate," said Matt Williams, a portfolio manager with Perpetual Trustees Australia.

"There are cost pressures building up in a lot of sectors, the raw material price increases are yet to feed their way through the chain," he said.

"The two big threats are any hiccup to the China story and the re-emergence of inflation."

Rising fuel cost is seen further crimping consumer spending and squeezing profit margins.

"The retail space is going to remain one of the more volatile sectors, as we head into the all important Christmas sale season," Williams said.

He is looking at stocks with stable profit growth such as general insurer Promina Group and likes health and media sectors for potential consolidation.

"We think the companies in the general insurance still have a solid outlook," Williams said.

Perpetual's flagship Australian Share Fund has performed better than the stock market for 10 consecutive years.

Williams is betting on gaming company stocks Tabcorp Holdings for their stable earnings. He also backs health care company Ansell.

He likes Kerry Packer's Publishing and Broadcasting also for its gaming exposure, while the other parts of its businesses are reasonably valued, he said, adding Southern Cross Broadcasting (Australia) is another favourite.

"There is a lot of money in the market chasing good homes. But I never look to weight of money as being a reason for the market to hold up, forever. When sentiment changes, then all the money in the world out there won't help."

Williams said a good indicator of a peaking market is the rush of small initial public offers.

"Historically, that has been a good indicator that the market may be nearing some kind of short-term peak."

- REUTERS