afic's chairman views on the market

  1. 3,412 Posts.
    Stock shock
    Sunday, October 9, 2005

    "If you're looking for value, then we've been finding it a bit harder but a good — a decent correction will start to throw up those sort of opportunities."

    Business Sunday reports on the dramatic drop in Australian and world stock markets and what's causing it.

    BRUCE TEELE, Australian Foundation Investment Company, Chairman: Well I certainly think it's a reality check Ali because the market, in September, went up about five percent, so we haven't seen all that given back but I think it is a very healthy correction and it's just really saying to investors the momentum is probably unsustainable.

    ALI MOORE: Does that mean you'd call the end of the bull run?

    BRUCE TEELE: Not so much that, what we've been saying to our shareholders is that we've been feeling that values have been very stretched, that is the share prices have gone up so much that the Australian market has been looking fairly vulnerable. Going along with that there's been a tremendous amount of money wanting to find its way into the market, it's created a lot of momentum so that money has been chasing assets. Now, all of a sudden, people are asking questions about perhaps what could go wrong, or what could bring the correction, so we've seen this sort of thing before Ali but it seems to me to be a very, very healthy adjustment.

    ALI MOORE: At the same time there's still a lot of money coming into this market and we've seen an impressive run of profits ...

    BRUCE TEELE: It's one thing to predict on-going profit rises but all of a sudden during the last week or so New York but locally people have started to raise the question are we about to see the re-emergence of some inflation so that's causing the market to sit up and take notice. If you will, we've seemed to live through the oil price rise but now as we're seeing some of the consequences and the flow-on effect in terms of the possibility of costs rising, then that seems to be starting to create the sort of reality check that we're having.

    ALI MOORE: So, in an environment like that, where do you go, what do you do?

    BRUCE TEELE: I s'pose it's our sort of market, you know us from, of old, we tend to be longer term value people and we've been finding it hard to see value, particularly as it reflected in the next year or two's earnings, so what we tend to do is to firstly take a longer view, secondly we'd like set backs as it were, so that it gives you some buying opportunities but the third one we're looking at is, what is happening behind the market, behind the profit levels, in terms of the generation of free cash flow and that's probably a very healthy sort of background situation to this market. If I can give you an example, if you look at BHP or Rio there's a huge flow of free cash being generated, obviously we hope quite a bit will come down the dividend chute but that is one of the characteristics behind this market.

    ALI MOORE: So, is it a time to sit tight, it is a time to sell, is it a time to look for buying opportunities?

    BRUCE TEELE: If you're looking for value, then we've been finding it a bit harder but a good — a decent correction will start to throw up those sort of opportunities. If you're in there with borrowed money, with a momentum game or I imagine if you're a hedge fund where you're highly leveraged, looking for very short term movements, then people may well re-assess their desire to be part of this game.

    ALI MOORE: So, at this stage the sky's not falling in?

    BRUCE TEELE: No. No, it's not.
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