Tower sounds caution over the near future for global equities

By Rob Hosking

Friday 30th August 2002

PAUL BEVIN: No rush for shares

Warnings emerged this week that the global equity markets might not yet have hit the bottom.

"A lot of commentators are saying it is time to get back into equities," Tower Asset Management managing director Paul Bevin said.

"We are being a bit more careful than that. The excesses of the last few years will still take some time to work through the system ... people entering the market now are essentially speculating that investor psychology is going to turn around. We would counsel caution on that."

World equities had gone through their biggest slump since the 1973-74 oil shock, he said.

"In some respects another appropriate comparison is with Japan in the 1990s," he said.

In an even more ominous parallel with Japan, he pointed out US Federal Reserve chairman Alan Greenspan had little more room left to cut interest rates.

Japan cut interest rates throughout the 1990s in a bid to attract a recovery, Godot-like, that never turned up.

That did not mean Tower had exited global equities, he said - the company had adjusted its approach in advance of the worst of the 2000 "tech-wreck" and was comfortable with the current mix.

However, it was holding to the view that this was not the time to change that mix.

The damage done to public confidence in listed companies in the US was a main cause for the continued caution, Mr Bevin said.

"That has done a lot of damage to the capitalist model."

And while the company believes the worst is over as far as the US stockmarket goes, there is still a wider economic slowdown to contend with.

New Zealand had managed to avoid the worst of the world stockmarket slump but it would be less able to avoid the global economic downturn, he said.

"The domestic economy is going to be less rosy for that the past couple of years."

Locally, Tower remains sceptical about the prospects for the government's pre-funded superannuation policy - the so-called "Big Cullen Fund."

Up to $2 billion a year will be put into the fund and Tower reckons about $250 million of that will go into the Stock Exchange.

"It's a fact that the government is, at the margin, borrowing the money and then investing it. It's a riskier strategy than paying off the debt, there's no doubt about that."

The Treasury figures assumed a 9% return on the fund, which seems to suggest all of it will be put into equities - thus heightening the risky nature of the policy, he said.

A balanced approach would involve spreading the risk and putting some of the fund into cash and fixed-term investments and the bond market. Cash would, on most recent performance, bring in 3-4%, he said, whereas 10-year bonds were running at about 6%.

Tower executives had another message for ministers this week: greater involvement of the private sector in the provision of health services would become imperative as the country faces and "avalanche" of demand.

Health insurance premiums would double over the next decade, Tower New Zealand chief executive Jim Minto said.

The demand for new treatments and the escalating cost of technology would drive those costs, he said.

Early signs of that had already emerged, with Tower's competitor, Southern Cross, moving to an age-based model for premiums earlier this year. Tower was already taking that approach. But the rise in costs would drive more people towards health insurance, he said. However, the demand would be for more flexible products.

There was an increasing demand for the old "life-and-general" approach, Tower general manager risk and investment products Richard Baker said.

Comments from our readers

No comments yet