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Rising tide of optimism banishes the bears

Peter V O'Brien

Friday 19th December 2003

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The first four months of 2003 in international investment markets justified a comment in last year's survey (NBR, Dec 20, 2002). But the rest of the year upended the comment.

"It will take more than a modest economic recovery in the US and other major economies in 2003 to restore investor confidence in their markets. At best, look forward to a dull year; at worst expect more sizeable downturns in the main international sharemarket indices."

It was dull until May and there were initially sizeable downturns in the indices, shown partly in the quarterly summaries in table IV. Recovery started in May-June, resulting in the six indices returning annual percentage gains for the first time in fours years.

The Dow Jones index's 9854 on December 2 was still 14.3% below the 11,497 recorded at the end of 1999. It appears the bear market is over. Recovery is likely to continue in 2004, subject to possible, and unforeseen, political upheavals referred to in the accompanying article.

The three US indices look set for a good year, assuming normal industrial and commercial activity in the US. That could change if Iraq continues to be troublesome and if there are any election jitters.

There will be numerous short-term ups and downs as gunslinging Wall Street traders treat every political and economic zephyr as a gale. An up or down in the US market flows around the world next day, reflected in overnight changes in Asia and Europe.

The phenomenon was seen in the first week of December when there was profit-taking on international markets as investors took opportunities to sell on price rises.

New Zealand investors dealing overseas, particularly in the US, in 2004 should watch the currency. US shares bought after converting New Zealand dollars to US dollars early in 2003 will realise fewer dollars if sold for US currency and converted back.

Conversely, buying US shares at the current exchange rate and selling them if the New Zealand dollar depreciated in 2004 would produce a currency gain, irrespective of the actual sale price. Such investors would take a currency loss if our dollar continued its appreciation.

Fund managers cover themselves against those eventualities through hedging the currency or using other derivative financial instruments, which may or may not require the backup of actual physical securities.

Asian share investments were "coming right" in the second six months of this year as the economies settled down and companies reported improved profits.

The recovery should continue in 2004, provided there are few international shocks, companies adhere to tougher accounting and disclosure rules, and their hierarchies behave themselves.

Past misbehaviour was a major reason for share prices in Japan, for example, failing to recover to the extraordinary levels ruling before the onset of what became known as the "Asian crisis" of the late 1990s.

New Zealand investors drawn to precious metals should be wary. Gold and silver have had good runs in the past two years, due partly to the depreciation of the US dollar in which they are quoted.

There were also attempts to protect financial assets against erosion from perceived threats from international tension, gold producers and dealers talking up prices and, regarding silver, a few operators apparently accumulating substantial stocks for later sale at handsome profits.

The London gold and silver prices this year are in table V. Gold sold in London at $US274.94 an ounce at the end of November 2001 and silver was $US4.13 an ounce. The gain to December 2 this year was 46% for gold and 32.2% for silver.

Precious metal prices tend to reach equilibrium as supply from existing private and public stocks and more economic production rise to match demand. There is talk gold will reach $US500 an ounce in 2004 but a 25% movement from the current price would see more product come to the market.

New Zealanders have to watch the supply-demand factor and currency movements, particularly if any rise in the US currency affects the London price.

No guarantees can be given about international financial markets in 2004, although people with vested interests will probably be optimistic in coming weeks. The best advice seems to be walk slowly but be ready to jump quickly in changing conditions.

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