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Meltdown remains on hold

By Peter V O'Brien

Friday 23rd May 2003

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Pessimists' forecasts earlier this year for a meltdown in major international sharemarkets have yet to be proved correct.

Figures in the table show what happened in New York, London, Tokyo and Australia since December 31.

This year's crunch happened in New York on March 11 when the three main indices hit 2003 lows (so far), as they did the next day in London, which effectively followed the US eastern seaboard given the five-hour time lag.

Reports from the US, related to the March 11 lows, said investors were worried about the (then) growing threat of war with Iraq and divergence of opinion over that issue.

London was affected on March 12 for similar reasons.

The war is over, despite serious post-bellum security problems in Iraq and general unease about the future in the Middle East.

Japan was the only major market to miss out on a mid-March low for the year. The Nikkei fell to a 20-year low on April 28 due to dismal profit results and forecasts from major industrialists.

Percentage changes to indices between December 31 and May 16 were positive in the US and UK, minor negative in Australia and higher negative in Japan.

That hardly proved the meltdown theory, although we have seven months left in 2003.

Much has been made of US economic problems, real and apparently potential, and a decline in the US dollar's value.

The latter could be, perhaps paradoxically, the saviour of the former. US industry has a massive local base but it's the world's biggest exporter. Its exports include raw materials in addition to manufactured goods.

A weak US dollar favours US exporters and hits importers, the reverse situation to that facing New Zealand importers and exporters as our currency strengthened against the US'.

The old argument that a strong US dollar reflects a strong economy and is good for business in that country fades in a downturn. It may be significant that the current US administration's view of the currency appears sanguine.

Agricultural exports from here to the US have becoming increasingly expensive over the past year.

A president from an agricultural state (ignoring oil production for the moment) who apparently gets by on a few hours' sleep a night is unlikely to toss and turn at the thought of hometown constituents and those from dairy producers getting effective protection from currency movements.

While it is impossible to forecast market trends with accuracy, because of the "react immediately, then think" mentality of equity dealers, reality is usually the winner.

US indices are well below the heights of the silly days when life was all go. Scandals, pricked technology euphoria and a descent from mania to sanity caused the reaction to unsustainable share prices, irrespective of companies' ability to increase earnings or deal with recessionary forces.

The bull market of the mid to late 1990s may be over but there are always bullish movements as the bear lumbers through the thickets and slows to negotiate snags.

A general definition of a bear market says it happens when each high is lower than the previous high and each low is lower than the previous low. The reverse defines bull markets.

International sharemarkets have yet to go through the full bear cycle but counter-cyclical traders had good opportunities this year.

They need to be quick over the next seven months to year-end but can be consoled with realisation that so-called sophisticated operators in New York and London have time spans limited to their next client lunch.


Dec 31, '02 May 16 Change High Low


Dow-Jones 8341 8679 +4.3% 8842 7524

(Jan 14) (Mar 11)

S&P 880 944 +7.3% 947 801

(May 15) (Mar 11)

Nasdaq 1336 1538 +15.1% 1551 1271

(May 15) (Mar 11)

FTSE 3940 4049 +2.8% 4081 3287

(May 16) (Mar 12)

Nikkei 8579 8039 -6.3% 8791 7608

(Jan 23) (Apr 28)

ASX 200 3007 2949 -1.9% 3077 2700

(Jan 15) (Mar 13)

Aust All Ords 2975 2922 -1.8% 3050 2673

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