Sept. 29 (Bloomberg) -- Australian investors should avoid consumer and manufacturing-related stocks, such as Coca-Cola Amatil Ltd. and Amcor Ltd., as spending declines and companies struggle to pass on costs, JPMorgan Chase & Co. said.

Record oil prices have inflated the price of raw materials such as the resin used in plastic bottles and curbed domestic consumption in the past year. Profit margins in fiscal 2005 rose by 0.1 of a percentage point, half the gain of a year earlier, said Martin Duncan, JPMorgan's Australian strategist in Sydney.

``Companies on average barely managed to cover the increase in input costs via price rises,'' Duncan said on Sept. 26. ``Earnings momentum is slowing.''

Australia's S&P/ASX 200 Index has climbed 15 percent this year, reaching a record high today, as companies posted earnings growth of 21.7 percent in the second half ended June 30.

Still, that's down from 26 percent in the first half, and analysts are predicting 14 percent growth for fiscal 2006, Duncan said.

JPMorgan surveyed 23 of the top 100 Australian companies by market value and found only 12 managed to lift gross profit margins in the second half, even as they cut operating costs and capital expenditure.

Duncan, who declined to reveal his age, joined JPMorgan as a strategist a year ago after a 20-year career as an analyst covering industries including retail, banking and insurance. He was rated the No. 2 retail analyst in Australia by BRW, Australia's top business magazine, while working at Sydney-based Macquarie Equities Ltd. in 2000.

JPMorgan Chase is the world's fourth-biggest equities brokerage, serving 8,000 clients in more than 50 countries, according to its Web site. It manages $1 trillion in assets for two million individual and institutional clients.

Slower Consumer Spending

Duncan correctly predicted earnings cuts among more than 100 Australian companies this year, including Miller's Retail Ltd. and Wattyl Ltd., as costs increased and consumer spending slowed.

Coca-Cola Amatil, Asia's largest Coke bottler, last month reiterated a May forecast of ``low double-digit'' growth for the six months ending December. Rising raw-material costs, mostly from metal and fuel, will lead to a 5 percent to 6 percent jump in the cost of goods sold. The shares have dropped 12 percent from their record high on Mar. 21.

Amcor, the world's largest maker of plastic soda-drink bottles, turned to a loss in the second half from a year-earlier profit, and abandoned its profit-growth target for 2006 as the company struggled to pass on higher resin and plastic costs.

The stock has fallen about 9 percent since April 21, 2004, when the company said it will close factories because of a slump in European demand and falling prices in the U.S.

Concern

``We didn't expect such a bearish outlook for many of the companies in the last reporting season,'' said Atul Lele, who helps manage the equivalent of $378 million, including Amcor shares, at White Funds Management in Sydney. ``The pricing issue for companies like Amcor is clearly going to be a concern going forward.''

David Cassidy, head of Australian strategy at UBS AG in Sydney, this year recommended selling shares of Amcor, He said earnings growth for Australian companies would fail to match expectations.

In the past year, the price-earnings ratio of Australian equities has expanded 4 percent to 14.7 times next year's earnings, Cassidy said in a note to clients on Sept. 14. In that time, the global ratio has shrunk 4 percent to 14.5 times earnings. That's the first time in 15 years of data recorded by UBS that investors have valued Australian shares at a premium to the rest of the world.

Oil Prices

Australia's A$800 billion ($607 billion) economy will expand this year at the slowest pace since 1992, the International Monetary Fund said on Sept. 12. Growth will decelerate to 2.2 percent from 3.2 percent last year on sluggish consumer spending, which accounts for about 60 percent of the economy, and a decline in home prices, the IMF said.

Australian consumer confidence sank to the lowest since March 2003, according to a Sept. 14 survey by Westpac and the Melbourne Institute, an independent economic and social research group based at the University of Melbourne. Westpac economists estimate rising gasoline prices had the same effect on the economy as a one quarter percentage point interest-rate increase.

Average gasoline prices reached an all-time high A$1.31 a liter in the week ended Sept. 11, up 38 percent this year, according to the Australian Institute of Petroleum. In the past 12 months, crude oil prices have surged 34 percent, peaking at $70.85 a barrel on Aug. 30.

Commodity Boom

Still, Hamish Macalister, Hong Kong-based head of quantitative strategy at Deutsche Bank AG, this month recommended investors should buy shares of Coca-Cola Amatil, whose earnings were shielded from deteriorating profit quality and growth in Asia.

Coca-Cola Amatil last month said first-half profit rose 17 percent after it introduced drinks such as lime-flavored Coke and bought a fruit cannery.

Duncan recommended buying stocks that will benefit from the boom in commodities prices, such as BHP Billiton, and companies that service the mining industry such as engineering company Downer EDI Ltd. and Coates Hire Ltd., Australia's largest machinery rental company.

Prices for copper, iron ore and coking coal have reached records this year amid surging demand from China, the fastest growing of the world's 10 biggest economies.

Passing on Costs

Last month, Downer, the nation's second-biggest publicly traded engineering company, said it will post an increase in net profit after tax for 2006 ``in excess of top-line sales growth'' as the company wins contracts in the mining industry and passes most of its increased costs through to customers.

Downer said in May its Roche Mining unit won contracts valued at more than A$850 million from the mining, minerals and infrastructure industries.

JPMorgan's Duncan said earnings from resources companies were making up an increasing proportion of total Australian corporate earnings. Commodities companies, including miners, make up 54.8 percent of combined forecast earnings for 2006, he said. That's up from 52.7 percent a year ago.

``A large portion of Australian earnings is locked in, thanks in some part to the increasing momentum behind miners, banks and energy stocks,'' Duncan said. ``We could see earnings cut among the industrial stocks, particularly those that are geared towards the consumer as well.''

To contact the reporter for this story: Stuart Kelly in Sydney skelly22@bloomberg.net

Last Updated: September 29, 2005 00:23 EDT