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    Clamour drives market, but how long will it last?
    By Richard Webb
    September 7, 2003

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    Talk to anyone connected with the sharemarket and they will tell you Australian shares are going higher - maybe not tomorrow, and maybe not by the end of the month, but certainly by the end of the year.

    The Australian sharemarket is expected to open lower tomorrow after the surprise news on Friday night that the US economy had lost jobs when many believed an economic recovery would have started to create jobs by now.

    September and October are also traditionally two of the worst months for shares. Historically, the US S&P 500 index has fallen in three out of every five Septembers, and October is the worst month in Australia.

    Despite this, local stockwatchers believe that, come the end of the year, Australian shares will be substantially above current levels - with some predicting highs 10 per cent above today's levels.

    Why? Because when everyone is looking to buy, as they were last week, the sharemarket must go up, they say. This is described as a classic liquidity-driven rally.

    They said they were inundated with calls from small shareholders last week clamouring to increase their share exposure and move out of cash and property.

    In addition, following a better-than-expected profit season, they believed Australian shares remained good value despite the 19 per cent rise in the S&P/ASX 200 index since mid-March.

    AMP Henderson head of investment strategy Shane Oliver has tracked the performance of the sharemarket in terms of the four-year US presidential cycle and found that, since 1928, the US market has risen on average 18.7 per cent in a president's third year, as President George Bush is in this year.

    The average gain in year four is 13.6 per cent, while years one and two averaged 7.5 per cent and 8.1 per cent respectively, he said.

    "The sharemarket might tread water for the next two months due to seasonal softness, but in the medium term I expect it will head higher," he said. "In 12 months time, I believe equities both globally and in Australia will be a lot higher than now."

    Mr Oliver said the Australian sharemarket remained good value with a dividend yield of around 4 per cent and with the prospective price-to-earnings ratio of 15 times future earnings.

    ABM AMRO chief equity strategist Gerard Minack said he believed the local sharemarket was heading higher because of the weight of buying. "It's got a fair head of steam behind it, and I expect this momentum will play a role."

    However, he said the pace of the rally could see it over earlier than expected and he was not particularly optimistic about the 2004 outlook.

    "Maybe the rally will last a month and we have another 10 per cent upside, or it could also take two to three months to do the same. But things could get a lot worse next year."

    Deutsche Bank global market economist Mark Jolley warned that the speed of the rally could price all the good news in quickly, at which point the sharemarket would settle. "It may be all over within the space of months and the market's priced everything in," he said. "At which point, investors will be sitting back asking 'what's next'?"

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