Shares cheap for long-term investors

By NZPA

Tuesday 3rd December 2002

World sharemarkets are "extremely cheap" and it is a good time for long-term investors, but there are also big risks in the short term, according to international fund manager Putnam.

United States markets had fallen as much as 40 percent in the past two years, although equity markets have been rallying for the past couple of months with the broad Standard & Poor's 500 index climbing 22 percent from the deep lows reached in October.

Putnam was appointed last month by BT Funds Management to manage BT's international shares portfolios, worth about $A5 billion ($NZ5.67 billion) in New Zealand and Australia. Westpac Bank bought BT earlier this year.

Putnam senior vice-president Andrew Barker, based in Boston, has been on a roadshow for New Zealand investors this week .

Markets had never been quite so difficult to predict, with more ups and downs to come. But shares had rarely been as cheap as they were now, he said.

"We do think markets are extremely cheap at the moment -- (but) there are still some risks that will lead to volatility," Mr Barker said.

Newspaper headlines on a possible war with Iraq, which some predict could drive oil prices to $US40 ($NZ81.20) a barrel briefly, and corporate accounting scandals and so on were affecting investor sentiment.

That was driving the markets, not the fundamentals -- the financial performance of the companies themselves.

But US firms were also in a credit crunch and finding it hard to borrow from banks scared to lend to another Enron or Worldcom, while US manufacturing was in recession.

Consumer spending had been a strong pillar of the US economy, but it was "no stretch of the imagination to see the consumer starting to pull back" Mr Barker said.

That meant consumer spending could drop off before business confidence and then investment returned.

"That is the single biggest risk to the US economy," Mr Barker said.

It may be late next year before business investment picks up again, though it had been constantly been pushed further out.

The United States was expected to show low but steady economic growth of about 2.5 percent for the next two years, with corporate profits moving ahead and driving up shares -- although "not substantially better".

"The risks are probably on the downside to that forecast," he said.

Even if war with Iraq did happen, oil prices would fall back to the low $US20 a barrel range by late next year, which would be positive for world economic growth.

Most of the opportunities would come from picking individual shares, based on extremely high free cashflow yields, rather than choosing business sectors or countries.

"That means it is probably a good buying opportunity for a long term investor, but we wouldn't want to make predictions about how you are going to fare in the next year," Mr Barker said.

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