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Opinion: Sharemarket proves resilient in face of doom and gloom

By Simon Louisson of NZPA

Friday 23rd December 2005

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The sharemarket has proved itself remarkably resilient in the face of doom and gloom confidence surveys and ugly economic indicators out this month.

The ANZ National Bank's business confidence showed confidence plunging to its lowest since the 1987 sharemarket crash and businesses have turned negative on their own prospects - normally an indicator of impending recession.

The Westpac Bank Consumer Confidence survey had consumers still positive but confidence making its biggest tumble in five years.

Meanwhile, current account data this week showed the September deficit at around $5 billion and the annual deficit a whopping 8.5% of GDP.

Finally, GDP data for the September quarter, published yesterday, showed the economy slowing faster than expected, eking out just 0.2% growth, and the annual rate slowing to 2.7% from 4.3% a year earlier.

You might have expected the sharemarket to respond to this accordingly - instead, the top 50 index rose over 4% from December 9, until the market closed today for its Christmas break.

Forsyth Barr head analyst John Cairns explained the market's equanimity by noting it had dropped over 10% in the two months from a peak hit in early October.

He said sharemarkets were forward looking and investors took heart from gathering expectation that Reserve Bank governor Alan Bollard will not now raise interest rates again next month because of concern about a "hard (economic) landing".

Macquarie Equities investment director Arthur Lim said New Zealanders should be careful not to talk themselves into a recession.

He said previous strong market rallies linked to powerful economic growth have been followed by the economy sharply contracting and the sharemarket failing to hand onto gains.

"The consequence is that a mindset has developed that the New Zealand sharemarket is incapable of hanging onto its gains, especially leading into a slowdown environment," he said.

"There is a perception, unlike Australia and other countries, we haven't successfully showed as a country that we have the policy settings right to engineer soft landings - we always end up with hard landings."

He noted that since the 1999/2000 recession, this was the longest period of uninterrupted economic growth in living memory for most people.

"There's a syndrome of people pinching themselves and saying `how can New Zealand sustain four or five years of above average, and higher than OECD average, growth? Around the corner there must be a gigantic freight train waiting to hit'."

Lim said there was no question a significant imbalance in the economy had developed in the form of the current account deficit, which had been driven by other imbalances, such as the lack of a savings regime that Australia and other countries possess.

But he said it was absurd for surveys to place the country on same level as the post 1987 environment.

"If you compare the economic situation now and then, it is not apples and pears."

The same goes for companies. Today's leaders, such as Telecom, Contact and Auckland Airport, bear no comparison with the Equiticorp and Chases of 1987, when essentially a pyramid game was in progress, said Lim.

"There are far too many comparisons being made about the recessions we have had in the past. There are big changes that have happened over the period."

Corporate balance shares are strong, companies have real underlying earnings, they have been restructured to be efficient, and are profitable.

"You have to put everything in perspective and the perspective is that we have a high currency and high interest rates, both of which are very cruel instruments to correct the current account deficit, and that really is the only major imbalance."

He said New Zealanders were even talking themselves into perceiving having the developed world's lowest unemployment rate (3.4 percent) as a negative because or correlated labour shortages.

"Well, try telling that to the French or Germans," Lim said.

"The challenge for New Zealand is to engineer a soft landing. If I was to boil all the concerns into one factor driving sentiment - it is a lack of confidence that New Zealand as a country, the Government and Reserve Bank, are capable of delivering a soft landing, because history suggests we are very bad at."

He said it was like New Zealand sports teams getting into winning positions against Australia and not having enough self-belief to win.

Similar, in the economy, Australia had engineered soft landings despite severe droughts, the Asian financial crisis and events such as Sars.

"The jury has to be out as to whether we are capable of engineering a soft landing," said Lim.

"Personally, I am optimistic."

He cites positives including high employment, strong demand for New Zealand goods (prices will come down but remain historically high), a very competitive agribusiness sector, a uniquely positioned tourism sector and the Government's strong books and infrastructure development plans.

"We are going to this time around have a cushion.

"We are uniquely placed, along with Australia, to benefit enormously from China and India and the rest of Asia."

New Zealanders should be careful not to panic when hedge funds, whose modus operandi is to create panic and mayhem so they can financially benefit, start selling the New Zealand dollar, Lim said.

He noted there was plenty of gloom around in 2004 when the economy grew 4.4% and the sharemarket rose 25%, and again this year.

"Given the amount of doom and gloom prevalent at the beginning of the year, I think the market has ended up in reasonably shape."

The NZSX-50 benchmark index has risen 8.8% for 2005.

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