Bears head for a bath in NZ market

By Kelly Beeman

Friday 25th October 2002

Many financial observers feel the New Zealand financial markets have been and will continue to be insulated from the dramatic drops in overseas markets. They cite growth, low unemployment and commodity advantages as insulators from the effects of foreign collapses.

The New Zealand market's capitalisation, as at May 31, 2002, was $US19 billion. Per capita, this was $US4800 with an average company size of $US134 million.

Compared against Australia, Denmark, Finland, Ireland, Japan, Norway, Singapore and the US, New Zealand was at the bottom of this list.

The next one up is Norway with a market capitalisation of $US66 billion, more than three times the size of New Zealand.

The sharemarket performance has been disturbingly low over the decade ending July 31, 2002. Brokers will mention the "gross" return, which includes dividends, but in this measure New Zealand exceeded only Japan (1%) and Singapore 3% of the countries mentioned above.

A more accurate measure is the "capital" return that removes the effects of dividends. The Dow 30, S&P500, Nasdaq, Nikkei and Dax are all measured on this basis because many investors take out their dividends to live. Of the countries mentioned above, only Japan and Singapore performed worse.

New Zealand's 2% gain in its own currency and .5% in US dollars compares with the world average of 8.0% in local currencies and 7.3% in US dollars.

So why are the bears swimming to New Zealand and why are the "insulating" effects misleading?

The US economy is in the beginnings of a double-dip recession and only its consumers can ignite global growth. This will have an immediate effect on nations such as New Zealand, which relies on exports to the US.

If other markets were better, this could be ameliorated, but these are no sizeable markets avoiding the global recession. In addition, much of New Zealand's export strength has been on the back of a cheap dollar and sound commodity prices. These have both ended.

The calamity in US markets will reach New Zealand and the effects could be very serious. At a P/E ratio of about 33, the NZSE has an implied return of about 3%.

With dividends in the mid-4%s, this means one of two things will happen either cuts in dividends or drops in earnings. Both are likely and the effects could be dramatic.

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