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Confidence returns unexpectedly in third quarter

By Neville Bennett

Friday 3rd October 2003

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Trustees and fund managers are walking more confidently this month now the results of fund performances are in. They are healthy. New Zealanders with exposure to international funds will have averaged a 15% gain in the last six months.

The gains were unexpected, as Wall Street and London usually go into the doldrums in the summer. There is an adage about selling in May and going to play.

This is the first positive third quarter since 1997. US mutual funds achieved an average increase of 5.3%, their best third-quarter since 2001.

Investors are also relieved. They are overlooking some scandals and increasing their investments.

But the flow of new funds is remarkably uneven. By far the largest amount of new money is going into real estate investment trusts.

Technology funds have performed well in the wake of the Nasdaq surging by 19% but the flow of new money is slow. Gold is the standout performer, with funds increasing value by 28%.

Investors, perhaps because of the painful recollections of the bear market, are overlooking the big funds. That is just as well as the huge Vanguard 500, managing $US83 billion, gained only 3% and Magellan, managing $US63 billion, grew a mere 2.2%.

It must be remembered that a lot of people are still not in the money. Most international funds New Zealanders have invested in are down for the year, and those funds that have a 10-year record have yielded an average of 2.8% after tax over the period.

Some massaging of the historical record will now take place. Funds can now base their three-year performance late in 2000. This is convenient as the horrific second and third quarters of 2000 drop out of the reckoning, leaving respectable figures.

It is not merely Wall Street that is positive. World equity markets have had their best third-quarter performance since 1991.

The FTSE world index rose 6.5%, its highest third-quarter figure in 20 years except for 1991's 6.8%. Growth has been negative in the preceding third quarter for five years.

Asia has been booming. Hong Kong scintillated with a 23% gain and Japan and Taiwan have prospered. Australia and New Zealand have also been standout performers. London's FTSE100 rose by a lacklustre 3.3%.

Naturally some commentators are trumpeting a return to an unequivocal bull market. Others are more cautious, pointing out markets can thrive only if there is consistent economic growth.

But the falling US dollar and increasing oil prices may delay a recovery. Certainly there are good signs, especially with the US economy growing at a faster-than-expected annual rate of 3.3% in the April-June period. But profits are falling and consumer confidence is dented by a weak job market.

The nub of the problem is that the US cannot continue to be the major propellant of the global economy. Americans have contributed 60% of cumulative world growth since 1995.

The present global situation is analogous to an airliner flying on only one engine. It is hazardous because US domestic demand is the driving force, but future demand might decrease as the US debt burden, especially the current account and fiscal deficit, could be more difficult to finance.

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