OZschwitz: After the binge, a thumping $400b hangover

BEARING the scars of a tumultuous year for business, the sharemarket recorded its biggest fall in 26 years in 2007-08, wiping close to $400 billion from investors' funds.

The market fell 0.4 per cent yesterday, capping off a financial year in which it shed almost 17 per cent, the worst performance since 1981-82, and the worst decline in the month of June since 1940.

Consumers cutting their spending, spiralling credit costs and record oil prices took the ASX200 to 5215.30 at yesterday's close, 23 per cent shy of last year's peak of 6828.7 recorded on November 1, and 16.9 per cent below last financial year's close of 6274.9.

The fall is in sharp contrast to the double digit growth of the previous five years and reflects opposing forces pushing the market, and sectors of the economy, in different directions.

Energy stocks surged 35 per cent, and materials jumped 17 per cent to meet developing countries' demand.

On the other hand, the global credit crunch after the US subprime crisis that began just under a year ago took a heavy toll on banks and companies exposed to the slowing domestic economy.

Financial, property and industrial stocks fell more than 35 per cent, Australian Securities Exchange indices show.

A portfolio manager at Perpetual Investments, Matt Williams, said companies reeling from the credit crunch were also being hit by flat consumer spending and confidence at its lowest point since the 1991-92 recession.

"We've had five years until this time last year of very strong economic conditions and earnings growth, culminating in the cheap money binge, which took our market to an extreme level this time last year. The credit crunch has exposed those businesses relying on leverage, and it's really found them out."

Few sectors were spared. One of the hardest hit was property, which fell almost 38 per cent over the year, Centro Properties being the worst performer - down 97 per cent.

The managing director of Maxim Asset Management, Winston Sammut, said enticing investors back to property would be a challenge. "Whilst current prices certainly represent very attractive levels, it will take a big change in sentiment, after such a bad year, to regain investor confidence."

Consumer discretionary stocks, such as those of Harvey Norman and David Jones, also dived, with tighter household budgets taking their toll. The head of investment research at Colonial First State, Hans Kunnen, said the division between sectors could continue to shape the market's performance.

"I think resources have still got a long way to run because of the massive global demand for steel. There's a building boom happening in Asia and we are providing the backbone."

But the resources sector also faces the risks of slower world growth and the rising costs of labour and fuel.

An equity strategist at JP Morgan, Paul Brunker, said he expected earnings from non-resources companies would fall in 2009, but the low share prices in these sectors already assumed much bad news ahead, and could represent good long term value if conditions improved.

Overall, analysts said how key economic risks, such as lagging growth and inflation, played out would determine the market's ability to bounce back.

Mr Williams said: "Looking ahead to the next 12 months, the real key for the market will be whether we have a soft or hard landing from these rate rises."

LNK
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