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Opinion: No end in sight for investment rollercoaster ride

By Simon Louisson of NZPA

Friday 23rd November 2007

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If you're feeling dizzy from the yo-yo like behaviour of world sharemarkets lately, you're not alone.

How long the present ups and downs on Wall St are likely to continue is difficult to say. But increasing volatility is a bearish sign and traditionally an indication of market "correction".

A string of sobering results from market giants like reinsurer Swiss Re, Citicorp and brokerage Goldman Sachs is confirmation that the subprime crisis is not going away quickly.

Evidence of the deeply rooted fear that the crisis could keep unfolding came earlier this month from the Chicago Board Options Exchange's "volatility index" (VIX).

On November 13, Wall St had a blistering run, with the Dow Jones up nearly 320 points or 2.4%.

But the VIX, Wall St's main measure of investor fear, logged its fourth-biggest daily percentage decline ever, dropping 22.4% to 24.10 after climbing the day before to a four-year high of 31.09.

There have been only five times in history that the VIX has fallen 19% or more. The previous one was a 23.15% drop on September 18, when the US central bank, the Federal Reserve, cut interest rates by 50 basis points.

Another gauge of investor nerves, State Street Global Markets' monthly global investor confidence index, has also seen a big drop in confidence.

This month the index fell from 82.0 to 74.3, the third fall in a row and the second lowest ever reading in the series since its inception in 1998.

Bank of New Zealand's chief economist, Tony Alexander, says the current bout of fearfulness is not surprising.

"This is what we basically expected to happen. That three months down the track from the whole thing blowing up in early August, there would be further revelations of large losses by US financial institutions, and that the risk was consumer confidence there would weaken."

Sharemarkets, after regaining strength on US interest rate cuts, are also expected to weaken again.

Alexander says investors should expect further volatility for the next six months, "at least", as companies reveal their true state through quarterly reports.

State Street analyst Andrew Capon said the current scare is proving both more persistent and more pernicious than other recent crises.

"The fact that the index is now lower than in the aftermath of the Russian debt default and the collapse of Long Term Capital Management (a major hedge fund in 1998) is telling."

Even though US interest rates have been cut and more liquidity pumped in, Capon notes "the salve of easier money does not seem to have worked yet".

"Investors are signalling their concern that the broader economy will not be immune from the distress in the financial world unless yet more is done."

Signs of risk aversion are all around, he adds.

Carry trades (where foreign exchange traders borrow in low interest regimes to invest in high rate places like New Zealand) are unwinding; institutional investors are modestly overweight in the low-yielding yen for the first time since June 2006; and London's three monthly sterling LIBOR had soared to a point just south of the height of the credit crisis.

The LIBOR, a reference rate based on interest rates offered by London banks to other banks in the wholesale money market, is particularly used for British mortgages with adverse histories.

Meanwhile, Americans and others nervously rake through their economic data for signs of recession.

What with the US housing meltdown, soaring oil prices, a weak greenback and unsold goods piling up in US warehouses, concerns about US growth rates are becoming very real.

A survey this month found six in 10 US consumers believed a recession was likely in the next three to six months

New Zealanders may feel far away from this but, Alexander notes, it's never completely insulated.

"Whatever economy you're talking about, there are concerns about their vulnerability to a slowdown in the United States economy, and also a slowdown in exports from many parts of the world to the US because their currencies are strong against the greenback."

The NZX-50 benchmark share index, an index which also accumulates the value of dividends, is back where it started the year. It is still 4.3% above its trough for the year touched in August but is down 6.5% from its most recent peak in early October.

The financial sector shakeup may make money more expensive to borrow, as investors remain cautious of exposure to non-government securities or organisations.

Meanwhile, the softer US dollar and our increasingly attractive interest rates mean New Zealand's currency could easily head back to US80c, Alexander says.

"There's a lot of reason to be cautious about the world global environment going forward."

On our sharemarket, caution should also prevail. Nigel Scott, a retail equities analyst with ABN Amro Craig, notes that Kiwis tend to stay on the sidelines during crises, and while our sharemarket will dip when Wall St falls, it fails to match the highs.

"So we're slowing moving sideways and downwards... If it wasn't for corporate actions, we'd have not a lot to talk about."

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