Why the worst may be over

By David McEwen

Monday 12th August 2002

When some expert says the share market has bottomed and things are looking up, it pays to check their credentials. There is no shortage of soothsayers prepared to say what people want to hear.

However, the latest optimistic comments have come from Jeremey Siegel, finance professor at Wharton Business School at the University of Pennsylvania. Professor Siegel is well known for being a conservative type who encourages investors to take a long-term viewpoint, most famously in his book Stocks for the Long Run.

In a recent interview, the good professor says he believes the US markets hit their low point on July 24, when the Dow Jones Industrial Average Index hit 7533 against around 8500 now. Given what he perceives as the underlying strength of the US economy, he is encouraging long-term investors to consider adding more equities to their portfolios. Since what happens in the US has a marked impact on the direction of the New Zealand share market, this sounds like good news for local investors as well.

Dr Siegel points out that many investors tend to quit a share market during a downturn. That can be a mistake.

Stocks' long-term return looks better now than at any time over the last four to five years. This is the time you want to go in. You should abandon stocks at the top, not at the bottom," he says.

However he cautions investors against investing money that they may need to pull out of the market within a few years. Share price volatility is a classic sign of a bottoming market, he says but "anything can happen to the stock market over short periods of time".

He stresses that the collapse of the technology sector was inevitable.

"In fact, the bubble that we saw in the last few years was actually quite unusual in the sense that it exclusively pertained to the technology sector.

The non-tech stocks really never were in a bubble."

Unlike more nervous observers, Dr Siegel doesn't put much blame for falling share prices on the corporate scandals that have attracted so many headlines lately.

While scandals may have played some role, it was not a decisive one. A more realistic explanation is that shares fell because the recovery in corporate earnings was as much as investors expected.

However, he is convinced growth will come. He's picking annualised economic growth in the US of 3% to 4% in the second half of this year and that should flow through early next year into higher corporate profits.

As investors know all too well, what's good for the US is generally good for the rest of the world.

While the New Zealand market has held up much better than most others this year, it is true to say that we didn't have as far to fall.

The good news is that if Dr Siegel is correct, and I am prepared to believe that he is because of his cautious nature, then the outlook for share investments over the next few years is generally positive.

As I mentioned a couple of weeks ago, investment success comes from buying shares in good companies when they are not popular with the overall market.

On balance, now seems like a good time to be buying.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz.

Comments from our readers

No comments yet