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The year of investing dangerously

By Peter V O'Brien

Friday 7th December 2001

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People who recall particular years by the events of a specific day will mark September 11 as the defining date of 2001.

It will join other famous and infamous dates of history when there was a major shift in world affairs, including international economic and financial conditions.

When NBR Personal Investor reviewed the first six months of the year on July 6, the thrust of the exercise was an examination of the level of volatility in international and local financial markets.

The review was unable to take account of the meticulous planning which, then and earlier, was going into the terrorist attacks designed for New York and Washington.

Business publications were in good company in that regard. It became clear that apparently highly sophisticated security organisations in major western countries, including the US, had little idea of the extent of the planned terrorism, despite later revelations that suspicious clues were available.

The flow-on effects of September 11, and subsequent retaliation against Afghanistan, will remain speculative for some time, although world financial markets bounced back from their initial slump.


New Zealand, in terms of sharemarket performance, came through the year in good shape. A comparison of Tables I and IV shows the NZSE40 capital index and the SCI (small companies index) capital outperformed the six overseas indices used as an assessment of international sharemarkets.

The New Zealand indices gained since the end of 2000, the only ones to do so apart from the Australian all-ordinaries.

New Zealand investors should not get complacent about that. Any serious downturn in major economics would affect us swiftly and knock our stocks.

There was the usual uneven performance among individual stocks. Index movements are weighted averages of many individual companies' share price movements and disguise the ups and downs.

Table III shows the 10 high performers and the 10 low from the end of last year to the November 26 close.

Apple Fields had a massive gain of 566% but the stock was excluded from the table because the end-2000 base price was 3c.

Fisher & Paykel was also excluded from the high performers. It was included in July but the split into two listed operations, and capital reorganisation, complicated exact calculations.

F & P effectively increased more than 100%, a point that should be noted when considering Table III.

The table shows the 10 high and low performers but there were other companies close to the cutoff point for each list.

Air New Zealand's share price performance was understandable and discussed in The National Business Review on November 30. That company's future sharemarket status may fade into a rump stock. The government has indicated it intends to retain its 82% controlling interest, rather than quit the airline after completion of recovery.

A change of government could change the share retention policy. The market will absorb that point but it dislikes uncertainty. It will be cautious about Air New Zealand while the government has control.

Renaissance's position among the low performers was a reversal of movements in 2000, when the share price improved 114% and the company topped the high performers' list.

The low performers' list again has an ominous large number of technology-based stocks, as was the case last year.

By contrast, another technology company, Software of Excellence, headed the best performers' list.

The provision of software systems to the dentistry profession may seem esoteric (it has apparently seemed esoteric even to some sections of the profession, according to the company's comments) but has been successful.

Software of Excellence sells systems overseas, as well as locally, and is an exporter, benefiting from the exchange rate.

The New Zealand dollar was 40.06USc on November 20 last year and 41.31USc at Personal Investor's cutoff date this year. A rise of 3.1% in a year when there were several ups and downs was not particularly significant. Violent fluctuations cause problems but they did not occur this year.

The appropriate strategy for sharemarket investment in New Zealand in 2001, as shown in the table, was the same as in previous years: stock selection and timing.

Local investors probably have enough savvy to avoid dealing in the handful of heavyweight stocks that attract international attention. The top 10 capital index - comprising the heavyweights - was 821.41 on December 29, 2000, rising to a 2001 high of 977.85 on April 20 and going to a low of 780.71 on September 17, the day the New York Stock Exchange reopened. It was 889.22 on November 26.

A comparison with the broader-based local indices shows a smaller gain this year but greater volatility between the year's high and low.

The overall performance of the New Zealand sharemarket this year reflected the comment made on July 6: "Company price performance for the rest of the year will probably be the usual mixture of strong rises, substantial falls and a large group that will have small movements."

That forecast was hardly brilliant insight: the different movements happen each year and comprise the standard operations of sharemarkets that have happened for decades, come booms, recessions, depressions, wars and the occasional outbreak of peace.

September 11 loomed in the interest rate area as governments attempted to avoid a slide into serious international recession.

A slowdown in economic activity was happening before the terrorist attacks. It was poised to accelerate after September 11, a matter that would be obvious to the intelligent people behind the terrorists as opposed to fanatical, suicidal operatives.

US Federal Reserve chairman Alan Greenspan led the way, cutting the lending rate to less than 3%.

New Zealand's Reserve Bank was close behind. The current (November 26) official cash rate (OCR) is 4%, compared with 5.75% in July and 6.5% at the end of November, 2000.

The OCR was raised periodically in recent times to dampen inflationary pressures but the cuts were designed to mitigate against the effects of widespread local and international economic downturns.

There was a corresponding decline in yields on all fixed-term securities, wholesale and retail, as shown in Table II, with the exception of five and 10-year government stock.

An average 200 basis points cut in retail deposit rates in 11 months was serious for people relying on interest returns to supplement other income.

Part of the decline resulted from the general downturn in returns, in line with the wholesale market.

Some came from a switch to fixed interest during the year, a trend that increased after September 11.

There was the usual favourable outcome for people for house mortgages but, as noted on other occasions, there is always a net surplus of funds deposited with banks over money borrowed from them.

Current interest rates reflect a change in the demand/supply equation, understandable given uncertainty here and overseas.

Much has been made in sections of the media about financial markets' historical capacity to bounce back after panic reactions to crises.

That view has validity, but investors should be aware of the "bouncing dead cat" syndrome. There is no guarantee 2002 will see a return to "normal" activity. Afghanistan and the Taleban may be bombed out of existence, Osama bin Laden may be "liquidated" and the US may go after and destroy other terrorists. That could be the short-term scenario.

A longer-term assessment suggests everything has changed. There is no guarantee replacement controllers in Afghanistan or elsewhere will be less repressive than the old orders. The US has a history of supping with tomorrow's devil to starve today's imp.

New Zealand enters 2002 in reasonable shape, particularly for business activities associated with rural activity and primary produce exports. The dairy and meat processing industries are enjoying buoyant prices. There is a downside there in that local retail prices for meat and dairy products soared this year.

Making predictions about what could happen in a coming year is always a dangerous exercise. It is much more difficult when looking at 2002. Massive uncertainty leads NBR Personal Investor to a possible cop-out: wait and see, adapt the Cromwellian expression and trust in god(s) and keep your financial powder dry.


Substantial unease remains over US economy and markets

Table IV tells the story of international sharemarkets this year.

There was some volatility in the early part of the year, weakening when an economic downturn in the US became apparent and the September 11 attack occurred.

A sizeable dip in US indices occurred in March when technology companies warned profitability was under pressure.

Things wandered along for the next six months until the September chaos. Media reports - including apparently calculated misinformation of "ordinary people's" response to September 11, flag-waving and market commentators - disguised and still disguise substantial unease about the US economy and markets.

Few people would say anything on the record, which could show a chink in the national defiance but, off the record (when the same defiance was probed), there seemed to be deep unease.

A few inquiries, on a "no-quote" basis, suggested the brave front could be brittle. It seems the populist mood, with administrative and media support, could put a massive hit on anyone querying the financial future and the international outfall post-September 11.

Other international markets reacted to events in the US but had their peculiar situations.

The Japanese have a history of expecting public contrition from corporate executives who get organisations into trouble.

They could have screamed when three executives of the world's biggest bank group expressed sorrow and resigned after losses in the billions of US dollars (trillions of yen).

Reporting of that story in New Zealand showed the constant cultural gap between different countries. What do we make of a headline that referred to the executives' "hara-kiri?"

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