By Simon Louisson of NZPA
Friday 28th March 2008
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There is no reason to assume our banks are in trouble, but the collapse of Bear Sterns in the United States -- America's fifth largest bank, albeit an investment bank, bigger than all our banks put together -- is scary.
The real problem is loss of confidence, said Oliver Saint from the NZ Shareholders' Association.
He noted Bear Sterns had a reasonable buffer of $US20 billion ($NZ25 billion) in cash but that evaporated in three days.
"If confidence is lost you have queues like with Northern Rock."
It's troubled times for investors. Not only are most investment classes including houses going negative, but recession is a real prospect.
BNZ economist Stephen Toplis says a perfect storm is brewing and New Zealand is heading for, or already in, recession, something the Reserve Bank disagrees with.
Bruce Sheppard, chairman of the Shareholders Association, makes Toplis look like Pollyanna.
"We have four converging events which tends to indicate to me that whatever is going to happen over the next 18 months is going to be way uglier than anything we have ever experienced in our lifetimes. And it's already happening."
The four events are a balloon in credit, balloon in property, household spending exceeding income and a commodity-oil shock.
New Zealand is heading for a classic double deficit that will result in a currency shake-out that in turn will exacerbate already high inflation.
"So you would have inflation taking off, unemployment taking off, double deficit, collapsing dollar, and a big, ugly, road-kill-through- the-windscreen-type hard landing," Sheppard says.
"Then at that point New Zealanders will be forced to live within their means because there will be a credit crunch here with capital flying out of New Zealand at the rate of knots."
Banks will get caught in a credit squeeze and will pressure people to repay loans, particularly those who are over-extended.
"You will get forced property realisations and the property market will sink further."
Economist and fund manger Gareth Morgan agrees. He said New Zealand and America were similar in that each runs on other people's money. That is evidenced by endemic current account deficits. This week's deficit for 2007 was revealed at $14 billion -- 7.9% of GDP.
These deficits are either funded by borrowing abroad or selling assets. Lately, banks have borrowed overseas and lent to the housing sector.
But as the debt servicing bill rises in proportion to income, banks become wary, particularly in the current environment.
Morgan notes house prices in the US have dropped 10% and analysts believe they may fall 30%. Already a quarter of home owners there have negative equity.
"We've not that different, if you look at debt servicing to income, we're not that far from America."
It's not just those who have invested in the likes of finance companies and property company Blue Chip that have lost heavily.
Some investors were put into ING funds. These had high credit ratings, were backed by one of the world's largest banks and were put into them by ANZ financial advisers. But some of these funds have been caught up in the US subprime crisis and have had to halt redemptions.
Share investors have taken a beating. The sharemarket has plunged 21% since October with many blue chip stocks down even more.
No 2 stock Fletcher Building, last year's market darling and as solid a company as you could wish, has dropped 35% from its October peak.
If you think things are better across the Tasman, think again. The S&P-ASX200 index has plunged 22% since October. And six of Australia's top 100 stocks mutated from multi-billion dollar enterprises into the penny dreadful class.
Companies like ABC which invested in the seemingly safe and growing business of child care, and Centro, which invested in shopping malls, have been nearly wiped out because they borrowed heavily and short-term.
When the debt needed to be rolled over, the credit crunch had arrived and banks were no longer willing to lend.
Saint does not even believe our banks are safe, especially the Australian owned ones.
"The only really safe bank is the Kiwibank."
So where do you put your money?
"Each individual has got to look in the mirror and say `Am I greedy? If I am, then I go out in the sharemarket and I buy as much as I want, it looks as if share prices are low'," he said.
But his advice at a critical time in the cycle is not to be greedy -- leave your money in the bank where you can get nearly 9% and be careful which bank.
"I have done nothing during the crisis, I have just sat and watched silly people lose their money."
Sheppard says four rules should be followed -- investments should be understandable, simple, directly controllable and liquid.
Property is not liquid while bonds, shares and cash are, he notes.
"Cut the layers out of equation. Don't put your money with financial managers, fund managers; buy shares directly; buy bonds you understand."
Some equities perform relatively well in recession. Anything with debt should be avoided. Look for high equity and high interest cover.
Manufacturing and retailing are hard because they have high fixed costs. Companies with high assets and low debt such as Port of Tauranga or Auckland Airport often perform better.
Infrastructure and companies producing things people must have, like food and energy, are generally good investments.
"In a recession you attempt to bottom-pick but you have to be financially savvy enough to know what something is worth," Sheppard said. "Recessions are not a thing for the financially dumb to be playing in.
"The way you survive a recession is have no debt. Lower your burn, and husband cash."
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