Australian economy to favour established heavyweights: analyst

Sydney, Feb 29 Asia Pulse - Established oligopolies such as News Corp Ltd and Telstra Corp Ltd will lead Australia's charge into the new economy environment, according to a leading investment firm.

Research by Salomon Smith Barney indicates that large established telco and media firms will be better placed in the Internet/technology boom than pure Internet companies simply because of the difference between the Australian market and the new economy mecca of the US.

Strong oligopolies will be favoured simply because of Australia's constraints of a small population and weak venture capital industry, it said. "Australian oligopolies will survive because they have important relationships, a local presence and are very good at maintaining their position in markets," Salomon equity strategist Mark Fulton said. "The focus is on market power."

While market heavyweights like News, Telstra, Cable & Wireless Optus Ltd and Publishing & Broadcasting Ltd will be in a strong position to exploit broadband and convergence opportunities, companies who develop technology, such as ERG Ltd in smart cards and Solution 6 Ltd with Application Service Provider (ASP) development will also be winners. But far from discounting all "old economy" stocks as losers (as the market seems to have done in the past few weeks), Salomon's said that some old world stocks will make a positive transition to the new economic environment. In this category, are banks, transport, tourism and insurance/healthcare stocks.

"These are companies in the middle world who are coming into the new world but don't look like tech stocks," Mr Fulton said. He added that transport companies like Toll Holdings Ltd and the major banks would benefit from the new world since they specialised in information transfers.

Salomon technology analyst Andrew Johnston added that smaller tech stocks would have to be "qualitatively valued" company by company, with investors looking at issues such as market share, management and consumer reach rather than traditional valuations of price/earnings ratios. As far as the prospect of an Internet bubble goes, Mr Fulton said that Internet stock prices would continue to go up and down, but the idea of a convergent economy would continue.

"The convergent technical notion of Australia is becoming accepted, with the recent correlation of the Australian markets with the Nasdaq (technology exchange in the United States)," Mr Fulton said. Themes to watch for during 2000 were a greater focus on e-business, more global alliances and acquisitions by old world companies to catch up, Mr Fulton said. He added that the financial house was revising its 12 month target for the all ordinaries to 3450 points, from 3300, to account for the impact of technology stocks. The all ords was trading today around 3131 points.

The research also estimates that new economy stocks would account for 50 per cent of total market capitalisation in the next five years, with technology adding around 0.5 per cent to Australia's annual GDP growth. However, spending on information technology would see more imports and also put pressure on the Reserve Bank of Australia to raise interest rates to slow down growth.