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Tony is a former managing editor of BRW, Shares, Personal Investor, Asset and CFO magazines. He writes a weekly column for BRW and The Australian Financial Review, specialising in small listed companies,IPOs, entrepreneurship and innovation.

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Energy and tech stocks in, telcos and property out for fund managers

Published 12 October 2012 05:26, Updated 13 October 2012 04:42

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Energy and tech stocks in, telcos and property out for fund managers

Powering up ... The simplest exposure to energy stocks is through a sector exchange-traded product, such as Australian Index Investment’s S&P/ASX 200 Energy exchange-traded fund. Photo: Jessica Shapiro

The latest Russell Investments survey has valuable information on how fund managers view asset classes and sharemarket sectors. Two standouts were a sharp increase in bullishness towards the energy and information technology sectors and more pessimism towards telco and property stocks.

The third-quarter 2012 Russell Investments Manager Outlook, based on the views of about 40 fund managers, tracks how the market’s biggest investors feel about asset classes and sectors.

The good news is about three-quarters of managers surveyed expected a sustained recovery in Australian shares to be under way by the end of 2013. Almost two-thirds expected it to begin this financial year. It could still take years for shares to get back to pre-GFC peaks, however, and much could go wrong given global economic fragilities.

That said, the fund managers’ views broadly match my central view for this year and last, of an Australian sharemarket oscillating between 4000 and 5000 points before a more sustained rally beginning later in 2013. I can’t see the S&P/ASX 200 bursting through 5000 points until there are clearer signs of a so-called soft landing in China’s economy and the Australian dollar eases.

Firmer Chinese economic growth will support higher commodity prices and provide much-needed support to resource stocks and a lower Australian dollar will boost industrial stocks, especially those that rely on exports and have offshore operations. I don’t expect a resolution this financial year.

But there is a case to add more growth assets to portfolios in anticipation of a slowly improving global economy in 2013. Fund managers surveyed by Russell favour growth assets such as Australian and international shares and local small caps over defensive assets, which include telco stocks, parts of the Australian real estate investment trusts sector and local bonds.

Do not abandon stocks with reliable yields for growth stocks with low or no yield but higher prospects for capital growth. Some of the best investments this year have been stocks with a good mix of growth and yield, such as Commonwealth Bank.

Those seeking more active exposure could investigate the energy and IT sectors, which attracted the most bullish sentiment in the Russell survey. Stronger global economic growth and oil supply constraints should underpin a higher oil price and support listed energy companies in 2013. A better global economy would boost demand for technology products and services.

I cannot get excited about ASX-listed IT stocks at current valuations. However, the software and services sector has performed well this year, with higher-quality companies such as UXC, DWS, SMS Management & Technology, and Technology One posting good gains.

The energy sector offers better value. Again, the simplest exposure is through a sector ETP, such as Australian Index Investment’s S&P/ASX 200 Energy exchange-traded fund – about 80 per cent made up of Woodside Petroleum, Origin Energy, Santos, Oil Search and WorleyParsons. Portfolio investors seeking direct stock exposure should stick to Woodside, Santos or Origin Energy and aim for a mix of capital growth and some dividend yield.

Small-cap investors might consider the undervalued energy service providers Miclyn Express Offshore or Decmil Group, which has strong exposure to central Queensland gas projects through accommodation projects. Another accommodation provider, Fleetwood Corporation, looks fully valued but should be on watch lists. Speculators could investigate Horizon Oil and Sundance Energy Australia. Bell Potter Securities rates both “speculative buys”. It has a target of 47¢ for Horizon (32¢ now) and $1.20 for Sundance (72¢).

Bell is especially bullish on Sundance given its low enterprise value (equity plus debt, less cash) after the cash injection of $US172 million from the sale of its 14 per cent stake in the South Antelope project in North Dakota. Bell Potter also has a “speculative buy” on Neon Energy.

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