Exposure Warranted

It’s a nervous time to be putting money into the sharemarket as sovereign debt problems in Europe threaten to escalate beyond Greece and shatter a tentative global recovery. However, an outstanding first-quarter reporting period in the United States is hard to ignore.

Of particular importance is the real margin growth and new business growth in companies such as Boeing, DuPont, Intel and IBM, even if it is in an environment of very cheap capital as US interest rates in effect remain at zero. It points to a real recovery in the US economy.

Principal Tom Murphy of Family Office Research & Management, a specialist wealth adviser to wealthy individuals and families, has gone bullish on equities for the rest of the year.

Going against consensus, Murphy expects the US Federal Reserve to start raising cash rates by the end of the year. Although historically that would initially spook markets, the first three rate rises are usually met with a rising market – it’s a solid indication that an economy is expanding. He also expects the Fed to lift rates slowly, unlike in Australia where the shift has been rapid. If correct, the indication may mean a rally pushing well into 2011.

Investors still have not realised the extent of cost-cutting that went on within US corporations, Murphy says, and that it has placed them in a strong position to get rapid margin growth from an improving economy. Those looking to diversify out of Australian shares should stick to the cyclical stocks, he recommends, as they have the most exposure to a US domestic turnaround.

Investors also need to have an exposure to emerging Asia, Murphy says. The current correction in Chinese markets, brought on by concerns of tightening liquidity, have affected the rest of the region and presented a good opportunity to set up in those markets while prices are in correction.

Domestically Murphy likes the big four banks as well as logistics and infrastructure companies such as Brambles and Toll Holdings. However, the focus is on companies that are not capital-development intensive and asset rich such as Asciano (March last year was a good time to buy its stock). It’s time to switch to “capital-light” service stocks such as Toll, he says.

With the supply of capital likely to be tight for years, Murphy says it’s also time to switch out of property stocks such as Dexus, Mirvac and Goodman Group.

Some investment banks are again offering leverage facilities to investors who want to build large equity portfolios, he says, but there is still too much instability in the global economy to warrant such risks. Instead, he says, stick to the companies with strong balance sheets and large cash flow such as BHP Billiton and Telstra. He also reckons QBE Insurance at its current share price just above $21.00 is a “free kick” for the long-term investor.

BRW

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