Lehman bankruptcy hits NZ market

Reuters

BAD DAY AT THE OFFICE: A stockbroker in Mumbai reacts to a sharemarket slump in the aftermath of Lehman Brothers' bankruptcy.

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New Zealand's sharemarket stumbled down 1.2 per cent, caught in the down draft of world markets taking fright as United States investment banking giant Lehman Brothers collapsed.

Lehman, till recently the fourth largest US investment bank, was due to file for Chapter 11 bankruptcy protection today. Wall Street was expected to fall sharply overnight, which is likely to hit New Zealand investor confidence.

Lehman is the latest high-profile victim of the 13-month-long financial credit crisis, which former US Federal Reserve chairman Alan Greenspan said was a "once-in-a-century event", which is more than likely to spark a recession.

The NZX 50 index fell 42 points to close at 3320 yesterday, holding up better than other markets. The Australian market fell almost 2 per cent, as big bank and resources shares took a hammering, and Singapore fell close to 3 per cent. The Hong Kong and Japanese markets were closed.

Despite continued ructions internationally, the NZX 50 index has been relatively steady in thepast month, not falling below 3300 points since the start of August.

Today may be a bigger test: the United States market is expected to fall sharply as Lehman Brothers hits the end of the line.

The credit crisis is expected to take some time to play out, perhaps many more months, with total losses expected to approach US$1 trillion (NZ$1.5 trillion).

At the same time, another Wall Street giant, Merrill Lynch, is to be taken over by Bank of America for US$44 billion, and big asset sales are expected by large insurer America International Group [AIG].

NZX chief executive Mark Weldon said by comparison the New Zealand market looked "pretty good and pretty safe" in the short term.

"We will be one of the better-performing markets in the world over the next few weeks, you would have to think, as this stuff unwinds."

With a fall in the Kiwi dollar, New Zealand was looking good for safe dividend stocks, Mr Weldon said.

"We are not exposed directly to this the way the Australian market is. New Zealand is not highly geared [with low corporate debt]."

NZ First Capital research manager Barry Lindsay said people were readying themselves for the fallout.

"It is quite a blow to confidence and markets are built on investor confidence.

"We are just going to go through a tough few days while all this becomes apparent."

NZ First Capital did not think the US bailout of Fannie Mae and Freddie Mac would not see a sustained lift in the market.

US shares were cheap, but "not cheap enough" yet and were expected to fall another 5 per cent to 10 per cent to reach an acceptable level, given earnings and the economic outlook.

"We might be about to face a 5 per cent decline in [US] markets," Mr Lindsay said. "I'm a bit resigned to a fallout here".

Lehman's collapse was not the end of the world.

"It is not cataclysmic. [But] we are going to go through a bit more price declines."

Mr Weldon said there were almost certainly no New Zealand retail customers with either Lehman or Merrill Lynch, because neither worked here.

The Wall Street financial crisis will alsoprobably hold up international interest rates, making it harder and more expensive for New Zealand banks to borrow overseas.

However, credit rating agency Moodys said the outlook for New Zealand's Australian-backed banking system was stable, but the situation was not that rosy for financial institutions overall.

Rated banks ANZ, BNZ, ASB and Westpac were strong and should handle weakening trading conditions, with a stable credit outlook.

- © Fairfax NZ News