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Don't make rash investment decisions: ING

Wednesday 17th September 2008

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New Zealand's benchmark stock index snapped two days of losses after the US federal government agreed to take a majority stake in American International Group.

Averting the collapse doesn't herald the end of the global credit crisis, however, and volatility in financial markets is likely to persist, according to Bank of New Zealand. The central bank may be willing to deepen its interest rate cuts to ease credit conditions, with some economists saying another 50 basis point cut is possible in October.

The NZX 50 Index rose 1.1%, led by gains in Fletcher Building, Contact Energy, Fisher & Paykel Healthcare and Sky City Entertainment Group. The benchmark index is down 20% this year, a period in which the domestic economy probably contracted. The Treasury predicts a pick-up in the fourth quarter.

"We have now got into what appears to be quite an aggressive easing cycle," said Craig Brown, who helps manage the equivalent of $3.3 billion at ING New Zealand. "We've got weakness in the currency, tax cuts coming and still pretty good strength in some (rural) commodity prices."

Still, there are short-term risks to investors. "If you look at the earnings outlook things are pretty uncertain at the moment - no reason to discount that," he said.

AIG avoided what Bloomberg News called the worst financial collapse in history by accepting the government loan. Markets ranging from oil to the yen backtracked after the announcement of the rescue.

Investors may be about to change tactics in the New Zealand stock market.

"In the equity sense we've been over-weight defensives - Lion Nathan, Sky City - stocks where the economic sensitivity, or the financial risk of slowdown is lower," said Paul Robertshawe, who helps manage the equivalent of $750 million at Tower Asset Management.

"We're still positioned that way," he said. Still, "supports for the domestic equity market are being put into place."

The New Zealand dollar traded at 66.32 U.S. cents, having climbed back up from as low as 65.50. The currency bought more than 81 cents in March. It bought about 70.05 yen and 82.86 Australian cents.

"The financial crisis increases the scope for further downside in New Zealand interest rates," said Bank of New Zealand currency strategist Danica Hampton. She said the bank's central forecast has the three-year swap rate bottoming out at 6.20% to 6.40% though it could fall lower if the financial crisis worsens.

ING's Brown said investors shouldn't make "rash, ill-informed decisions about what they should be doing with their investment portfolio."

"The key issue is everybody is going to be in slightly different positions," Brown said. "Do some digging or talk to investment professionals so you can make an informed decision."

By Jonathan Underhill

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