Economic turmoil can mean opportunity

It is always interesting to gain an international perspective on New Zealand because we tend to think of ourselves as a small country a long way from the rest of the world.

Recently, I had a meeting with Bill Buechler, who runs an investment management company in the United States. He is amazingly confident about New Zealand's prospects in the next decade or two and believes our economy is heading for a boom.

We are set to enjoy big cash infusions from the continuing commodities boom, New Zealand's image is that of a safe and attractive place to own property, and, most significantly, it has an oil bonanza he believes could be as significant as the North Sea oil boom was to Britain.

New Zealand has big, barely explored territories with promising geology for oil deposits. Mr Buechler is convinced there is a lot of oil out there and, with the black gold at more than US$100 a barrel, there is an incentive to look hard for it.

His optimism contrasts markedly with the present state of New Zealanders, who are worried about falling share prices, a softening real estate market, rising interest rates and collapsing finance companies, among other worries.

One approach to address market weakness is to hold more cash while selling smaller or lesser quality shares to raise more cash. When the time appears right, that cash can be used to buy good-quality shares at what appear to be attractive prices.

However, I am concerned about news that Bear Stearns, the United States' fifth-biggest investment bank (and one that survived the Depression of the 1930s), has essentially failed, been bailed out by the Federal Reserve and is about to be taken over.

This suggests that a failure of the entire financial and banking system is possible and, if it were to happen, would probably have harmful knock-on effects in the areas of property and economic growth.

When in doubt, I like to look hard at the intrinsic businesses we are invested in. After September 11 I asked: "How does the destruction of two office buildings in New York affect the earnings of companies in New Zealand and Australia?"

The answer was: "Not a lot", so we started buying at what turned out to be bargain prices.

Today we are asking: How does the failure of financial services companies in the United States and locally affect the earnings of companies in New Zealand and Australia?

The answer is: It will affect those who borrow a lot, have significant exposure to property or are sensitive to consumer spending.

Portfolios that have significant exposure to these pressure areas should look at reducing this exposure, while retaining, and one day buying, those companies that are keeping their heads down and making money for shareholders during these tumultuous times.

The flipside to turmoil is opportunity, but you need to identify where the real risk is, and where the opportunities lie.

* David McEwen is managing director of Investment Research Group.