Bargains to be had in share shakeout

THE share market has started the New Year in same jittery mindset as it ended 2007, so investors need to target cheap shares in companies immune to the credit.

Bargains to be had in share shakeout

THE share market has started the New Year in much the same mindset as it ended 2007 - jittery.

The gyrations in the world's share markets will no doubt shake out some of the more nervous investors who simply cannot stomach the roller coaster ride. However, are the triggers that have caused these movements really a crisis?

Obviously, the sub-prime "crisis'' in the US has had a massive and irreversible negative effect on a small number of Australian companies. The market is not expecting RAMS Home Loans or Centro Property to regain the lofty heights of yesteryear, and they will be battling to survive 2008.

The impact of the sub-prime "crisis'' is no longer confined to US home borrowers with poor credit ratings. It has reverberated through all credit markets. The cost of borrowing money has increased across the board, and those costs have filtered through to Australian consumers.

The volatility in the market over the last few months reflects the fact that two scenarios are possible.

The first scenario assumes that at some point in the near future lenders will go back to their business of lending money and borrowers will be able to refinance on reasonable terms. The world's economic wheels will start to turn once more and growth will continue.

The second scenario assumes that the sub-prime "crisis'' will stall US demand for housing and consumer goods, fuel unemployment and tip the world's largest economy into a deep and sustained recession.

Perhaps the best forecast lies somewhere in between these two extremes.

The markets have been factoring in more short-term pain in recent weeks as weak US data emerges.

The US Federal Reserve is likely to cut interest rates once more as talk of a possible recession becomes louder. US politicians seem to be highly attuned to the risk of a full-blown recession, and if their economy stalls, there will be a concerted effort to arrest any slide.

In a few years' time, this systemic shock will probably have passed and the markets will be back to business as usual.

"Sub-prime'' will be remembered as little more than the 2007 word of the year, rather than the trigger for the next great depression.

By taking considerable care, investors will be able to pick up some relatively inexpensive shares in companies that are immune to the credit crunch.

Stuart Wilson is CEO of the Australian Shareholders' Association.