Opinion & Analysis
OPINION: Kiwis should be celebrating a rare event: late last week the NZX 50 index became the world's top sharemarket performer over the past month; it is also trading at four-year highs.
This was an outstanding performance given that all markets, except Japan, have also been rising as optimism mounts that the United States stimulus and related moves mark a vital turning point towards improving the world economy.
Over the past month the NZX 50 was up 5.81 per cent, nearly double the US Dow Jones and S&P 500 indices and the Australian All Ords.
On an annual basis we are not doing badly: up 17.14 per cent, though outclassed by the 26.64 per cent rise in the Dow Jones, and the US Nasdaq tech stock index.
Underpinning the recent strength in our market has been investors reinvesting some of the $866 million in maturing fixed interest investments which did not give holders the chance to reinvest.
I've been following sharemarkets for years. It's great to see many investors flocking back to our market which has been much more rewarding since 2007 than finance companies and some fixed interest securities.
But while the market's boisterous behaviour is exciting, it is also somewhat unnerving, especially in October, when nasty upsets occurred in the past - including in 1987, a year some Kiwis will recall with horror.
Markets don't rise forever: it is healthy for them to take a breather at times - or experience “profit-taking”, to use the jargon - before gaining strength again.
Taking its lead from positive overseas markets, confidence has risen in recent months. Extremely low interest rates - and promises they'll stay down - and northern hemisphere money printing have been encouraging investors to move into riskier assets like shares.
The next three months will be crucial to see if this optimism continues. There are some big hurdles. The US may have a new president, who could curtail the US Government and Federal Reserve Bank's programme to reinvigorate its economy that has belatedly shown some signs of success. A new government is likely to restrain domestic spending and introduce a worrying new agenda for American foreign relations in the Middle East and elsewhere. These could have profound global consequences, not just for financial markets.
The US also faces the feared “fiscal cliff” over its rapidly growing national deficit. December marks the end of President Barack Obama's temporary tax breaks for business and workers, putting 1000 government programmes at risk. Any resolution looks difficult, with a huge divide between Republicans and Democrats on these issues.
In spite of intense efforts to ease the situation, problems over European debt problems continue, most immediately with Spain, but also over the future of Greece in the euro.
There will be new leaders in China and a new five-year plan. Will they reverse the present enforced economic slowdown, imposed due to inflationary fears, and start spending money to reinvigorate its slowing economy?
While this is of concern to both the US and Europe, this is a headache for our biggest trading partner Australia, which suddenly is facing graver economic problems than we do thanks to a substantial fall in “hard” commodity prices including iron ore. Australia's problems are not helped by its high dollar.
New Zealand exporters are also being hurt by our high currency, though critics overlook the fact that it cushions the price of essential imports including oil and agricultural inputs including machinery. This allows our country to play to its strengths in exporting so called “soft” commodities, including dairy and grain which Asian and other nations will continue to pay good prices for even if their domestic economies run into strife.
After 40 years when the world wouldn't pay decent prices for our agricultural exports, suddenly a food-starved world is paying handsomely for much of our produce.
By and large Kiwi investors don't grumble. But many of those who have invested heavily in Australia over the past decade must be having second thoughts. The value of their Aussie shares in New Zealand dollars has been falling steadily.
This situation could worsen if forecasts that the Australian dollar will continue to rise against our dollar prove correct. A chill is descending on the Australian mining sector.
The Australian Financial Review says many Australian investors are deeply concerned ahead of the annual meetings season. Most companies failed to give any guidance at their half-year results, but chairmen will have to own up at these meetings.
The average Australian forecast of earning per share is nine per cent, but some analysts expect it to fall to between five and seven per cent when companies admit how tough the economic climate is proving for them. This could be bad news for Aussie share prices.
Kiwi investors should also watch for updates at our meetings. Most companies reported that conditions were challenging in their interim reports.
Any negative comments about future prospects would take the steam out of some of the better performing stocks.
- © Fairfax NZ News