Stick to solid Aussie stocks unless you have deep pockets

By Peter V O'Brien

Friday 1st March 2002

A discussion of market and company prospects in Australia at any time will provoke debate given New Zealand investors' awareness of the Australian financial scene and widespread holdings of Australian equities, from the largest companies to the smallest.

It is impossible to cover the full range of Australian equities but it can be said safely the Australian Stock Exchange will continue to be among the world's best-performing, particularly among developed markets.

Many developing markets have an advantage in comparative growth terms, because they reach a "critical mass" stage, which their developed counterparts reached years ago, and consequently can produce rapid and substantial gains in a short period.

A similar phenomenon is seen among individual companies which can grow quickly - if managed properly - and have greater flexibility and opportunities for capital gain than the "mature" heavyweights.

Investors have their favourites among Australian companies and are well served with brokers' research material, although the brokers do not prepare the material for love.

They want a return, in terms of brokerage and intangible client relationships.

It is an open question whether some fancy research departments pay for themselves when they usually analyse the same basic data and reach conclusions broadly similar to those of their competitors.

A look at the 20 biggest Australian companies by market capitalisation has two merits.

It avoids moving Personal Investor into the stock-tipping field and, through dealing with 20 big companies across many industries, probably drags in many of the stocks, if not most, held in New Zealand.

An examination of Australian stocks in NBR Personal Investor on February 4, 2000, put the total market capitalisation of the 20 biggest companies on that indicator at $A340.84 billion.

The total of the 20 companies in table II was $A400.77 billion on February 14, an increase of 17.58% in two years.

The basic structure of the current list is the same as two years ago, subject to change through takeovers and movement in individual capitalisations.

Banks were the big winners in the latter category. National Australia, Commonwealth, Westpac, ANZ and St George had a combined capitalisation of $A139.48 million on February 14. That was an increase of $A30.49 billion, or 28%, over the $A108.99 billion recorded early in 2000.

Table II also shows a phenomenon of the New Zealand market is not confined to this country. A handful of companies dominate our capitalisation figures. That is also the case in Australia, albeit to a lesser extent.

The first three companies in table II were capitalised at a total $A140.29 billion. Companies ranked eight to 20 (13 organisations) accounted for $A143.7 billion.

It was also significant that Australia's 20 biggest companies in each year were - with the exception of CSL, which is classified in the technology/ healthcare sector - operating in traditional industries.

Long-established companies with substantial assets and solid continuing profit records dominate any stock exchange.

They may not grow as fast as spectacular high-fliers but they carry less downside risk, a point underlined in Australia and elsewhere when the technology bubble exploded in recent years.

That fact leads to the proposition that New Zealand individuals moving into Australia should stick to solid companies, unless they have a relatively high risk-tolerance and the financial strength to carry losses.

It is a question of how much excitement you can stand before things get too much.

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