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The O'Brien Column: Politicians should talk up solid business, talk down blue skiers

Friday 24th March 2000

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The O'Brien Column

The government's celebration of its first 100 days in office coincided with the end of the reporting round for listed companies with a full-year or half-year balance date of December 31.

Although the two events were just coincidental, it showed the effect of government action on business and the fact that business profitability often depends on what political administrations do to the economy.

Both factors eventually influence investor confidence as expressed in share price movements.

The government's actions in its first 100 days and talk of things that might happen in future were a mixture of concrete implementation of election policy and statements from some ministers about matters that could affect private sector profitability.

Company profit announcements in the reporting round were based on a trading period almost over when the government took office but the six months to June 30 should see the effect of some government policies.

The introduction of the Employment Relations Bill and renationalisation of ACC will have a direct effect on business activity, although it is too early to assess the exact outcome.

Proposals to set up a giant superannuation fund from dedicated taxes and Deputy Prime Minister Jim Anderton's talk of a "people's bank" would have a less direct effect but the former would certainly be a strong influence on investment markets.

Equity investors should be wary of the superannuation fund proposals, because it has to have managers, either external through contracts with existing fund management organisations or internally with its own group of appointed managers.

Whatever is done, Finance Minister Michael Cullen's scheme has the potential to increase market volatility.

There would be a substantial fund looking for a home and/or switching out of particular homes if the managers were pessimistic about returns.

The proposed superannuation fund has a peculiar element, assuming the managers followed the standard asset and risk control techniques of the managed funds industry.

Those techniques lead to funds being invested across asset classes, both in New Zealand and overseas. New Zealand is too small for a large fund to invest all its money here while minimising risk.

Dr Cullen's proposed fund could be in the curious position of placing a high proportion of its money overseas if it were to avoid owning massive chunks of New Zealand investment markets, including most of the large listed companies.

The latter situation would occur irrespective of now many contracted or internal managers were administering the fund.

Fund managers link equity investments to the weightings particular companies have in the major market indices, give or take a few percentage points.

All the large New Zealand-based funds, for example, have a stake in Telecom, our largest company by market capitalisation with more than a quarter of the total.

Dr Cullen's proposed fund would take years to reach its peak size and would also have investments spread across asset classes and probably across countries.

It can be seen, though, that more or less matching its New Zealand equity funds to companies' weightings in the indices could eventually make it the dominant player in the New Zealand sharemarket, which may or may not be desirable.

Market dominance creates the climate for volatility if the manager(s) decide to increase holdings or shift out of the investment as the economic and business climate changes.

The "people's bank" idea may not come to practical fruition, given the difficulties in setting up an efficient banking operating operation in competition with the majors.

Assuming it did open its doors some day and took substantial business from the current large banks, it could achieve market dominance from the current large banks. It could also have the potential for market dominance.

Government activity in its first 100 days also coincided with a downturn in the local equity market as overseas-based investors decided other markets were more attractive and sold down New Zealand.

Dr Cullen's strange comments about the supposed relationship between the New Zealand Stock Exchange's activities and poor equity prices did nothing to help investor confidence, although it was probable that most people involved in the market shrugged them off as throwaway lines from the uninformed.

We have reached the unusual situation where companies reported higher profit, substantially higher in many cases, but share prices have been either static or declining.

A time is reached in the life of any market where a selloff goes too far, prices are seen as bargains and those seeking bargains resume buying.

That may take 100 days, or a shorter/longer period, but it will happen, provided the government, among other influences, does not insert a cold blast into the investment climate.

The infatuation with technology stocks held back share prices of major industrials but that can change quickly, as shown in the US last week when there was a return to "old economy" companies with a consequent solid rise in the Dow Jones index and a decline in the Nasdaq, which is heavily weighted with "new economy" stocks.

Perhaps the government could help the equity market if it spent its next 100 days talking down the blue skiers and talking up solid businesses.

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