Kiwi shares set for reasonable year again

Peter V O'Brien

Friday 19th December 2003

The New Zealand sharemarket has outperformed the Australian for the third successive year. Movements in the NZSX50 gross, NZSX40 capital, ASX200 and ASX all ordinaries indices are in table I. Only the local 40 capital index is comparable with the Australian indices.

The Australian indices got into positive territory in 2003, after negative returns in the preceding two years.

Thoughts turn at the end of any year to what the future holds and how one can take advantage of possible outcomes. The occupation of investment soothsayer is as risky as foretelling the future in any field but the events of this year provide some broad clues to 2004.

Local and international markets confirmed their hatred of uncertainty and acceptance of situations when there is certainty.

An imminent war between the US-led coalition and Iraq was the big uncertainty of the first three months. The uncertainty saw New Zealand and Australia sharemarket indices hit 2003 lows on March 13, virtually the same day (given time differences) as for the US and UK. Lows in Japan and Hong Kong were in April but the mid-March figures were close to those of late April.

The war started later. Indices then began a sustained recovery, admittedly in conjunction with the release of figures showing slow recovery in world economies, particularly the US. Probable political uncertainties next year include the ability of the forces in Iraq to handle what has become a guerrilla exercise against their presence, resulting in more coalition deaths than the formal "war." This week's capture of Saddam Hussein is one piece of good news for financial markets.

The issue of terrorist attacks in various parts of the world is the second main political uncertainty and is linked to the Iraq situation.

It would be sensible, if tragically cynical, for investors to accept the po ssibility of more attacks, which could have immediate, albeit likely short-term, effect on markets. That approach is neither defeatist nor "giving into terrorism." It acknowledges the difficulty in stopping religious and ethnic fanatics killing others when they engage in suicide.

The US residential, congressional and state elections form the third political uncertainty. US investors are always twitchy in the rundown to elections, particularly for president. Any signs that incumbents could be defeated or of changes in the congressional political balance affect US markets' assessments of the future double uncertainty which immediately spread worldwide.

International economic positives include the now-established economic improvement in the US, despite market flutters when the occasional data is below expectations.

The main influences in Australasia for 2004 will be interest rates, exchange rates and the price performance of individual stocks as opposed to indices, which reflect market averages.

Some New Zealanders have adopted an unfortunate practice of referring to their "strong" dollar. It is more than a semantic exercise to assert that the US dollar is weak, rather than New Zealand's being strong, in part because the US administration has seen merit in weakness to assist trade imbalances. Table II shows annual movements in five of New Zealand's major trading currencies and in the trade-weighted index (TWI).

Figures for the latter are calculated from currency movements related to those in which our trade is conducted and therefore take account of commodity prices (imports and exports) denominated in US dollars.

The TWI movement this year was slightly more than half of the New Zealand dollar's appreciation against the US currency.

A movement of 4.9% downward relative to the Australian dollar is often overlooked. Assuming the US dollar improved internationally in 2004, the New Zealand dollar would "deteriorate."

That assumption would be realised if the US finally realised it was unlikely to persuade China to break its US dollar link, which maintains the Chinese trading positions against the American at any exchange rate.

Continuing US economic recovery would also assist its dollar. Interest rates rose in Australia when its Reserve Bank listed the cash rate from 5% to 5.25% on December 3.

The New Zealand Reserve Bank left its official cash rate (OCR) unchanged at 5.25% when it reviewed the position on December, deciding dampening the dollar's movement was more important than popping the housing bubble.

It is a safe assumption the OCR will rise, at least in the first quarter of 2004, in line with a likely weakening of the dollar or in an attempt to limit locally generated inflation.

The Reserve Bank can control the OCR but has no influence on the exchange rate, because the OCR is only one element in currency pricing.

New Zealand shares should have another reasonable year in 2004 in index movement terms.

Individual investors should be seeking individual stocks with good prospects and leaving the business of weighting portfolios with each company's proportion of an index to fund managers.

Table III lists the 10 high share price performers and the 10 low from the beginning of 2003 to December 3.

Percentages were based on net capital changes, ignoring dividends, but adjusted for issues of new shares.

All the top 10 were well above moments in both the NZSX50 gross and 40 capital indices, as were several others, and the low performers were substantially inferior to the indices.

An exercise based on share price movements for 11 Australian companies with market capitalisations (share price multiplied by shares on issue) of more than $A10 billion each showed only four outperformed the ASX 200 and all ordinaries indices.

The 11 were Australia's biggest companies, showing again, as in New Zealand, that biggest is no guarantee of best.

Both countries should have good investment years, provided there are few figurative, or actual, explosions.

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