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War has its winners

By Peter V O'Brien

Friday 24th January 2003

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Investment markets worldwide have begun the year with the same volatility and uncertainty they displayed in 2002. New Zealand was no exception.

The NZSE40 capital share index closed at 1945.39 on December 31. It reached its highest level since mid-2000 on January 15 at 2015 but had retreated to 1994 yesterday.

Similar movements were seen in the US, UK, Japan and Hong Kong.

The New Zealand dollar gave the impression of being almost out of control against other major currencies, as did the trade-weighted index. The latter was more a result of a weak US dollar in relation to the rest of the world than a sudden spurt in New Zealand economic conditions.

New Zealand's relatively high interest rates were another factor in the dollar's surge. The currency's movements caused the usual standoff between exporters and importers, the latter including manufacturers as well as dealers in imported consumer goods.

Many commodities, exported or imported, are priced in US dollars. The New Zealand dollar appreciated more than 5% against the US currency between December 31 and yesterday, a situation likely to affect primary produce exporters in particular as prices for such commodities are forecast to weaken. The kiwi is at its highest against the Aussie dollar since 1995.

Currency experts seem divided on chances of it reaching parity, a rate not seen since removal of currency controls in the 1980s. Any more improvement would be good news for New Zealand consumers, particularly those attracted to the range of Australian processed food products that occupy many shelf-metres in supermarkets.

Food consumers could also benefit in other ways from currency appreciation. Local prices for meat and dairy products are related to the export price, where returns are a combination of the base unit price and exchange rate.

The public is regularly assured (despite equally regular contrary indications) that a fall in returns translates to declining local prices for those goods.

The eventual effect on primary producers and the country of lower returns from exports would offset consumer gains, perhaps severely but few people on the lower levels of the income scale consider that when balancing family budgets.

World markets have become increasingly worried about the potential of war in Iraq, the US standoff with North Korea and other geopolitical factors.

Those matters, plus political issues in Venezuela, accounted for rising oil prices, another drag on international economic health that flowed on to investment markets.

The concerns among US investors about the possibility of war in Iraq may be well placed morally and in political terms. At the risk of accusations of icy cynicism, it is appropriate to reiterate a view expressed in The National Business Review last year.

The mainland US will not be invaded, ever, although more terrorist attacks are always possible. A war gives impetus to a non-invadeable economy such as the US Military hardware has to be stockpiled against probable losses and the actual losses replaced.

Producers of everything from miners to components and computer software and hardware get a boost, irrespective of the effect on the US government's deficit down the track.

That has been the basis of the conspiracy theory about the US military-industrial alliance. It is irrelevant whether the theory is valid or has no merit.

World investment markets will react adversely if the US goes to war, with or without agreement. Operators would eventually realise the brutal fact that the economy would benefit, win or lose, and soon forget the bodybags and lost equipment.

There is nothing new in that. UK industrialists made fortunes and were cynically awarded honours after World War I. The UK was un-invadeable then.

Several US industrial families had fortunes in 1941. They made much more in the ensuing four years and later after receiving massive government contracts.

Desire to increase wealth and sheer greed have always been market drivers. That will not change this year.

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