All bubbles have burst in turbulent year

Friday 1st December 2000

Investors have had a bouncy ride this year and could finish 2000 with some bruises. A combination of the new government's policy changes, a declining dollar and international developments have had a largely negative effect on our main investment markets.

Things started well on the sharemarket with a group of technology stocks continuing their strong price runs of late 1999. But that changed after a shakeout in the US, where the market applied some sound analysis to the sector and decided investors were paying manifestly excessive prices for stocks that had no profits, little or no cash flow and pie-in-the-sky prospects.

Tables I, II and III show the overall performance of the sharemarket up to November 20 in terms of movements in the NZSE40 capital index and the small companies index (SCI), shares that gained more than 40% in price during the year and those that lost more than 50%.

It should be no surprise only two technology-based companies were among the 10 best performers while eight appeared in the 12 that lost more than half their market value. The experience of technology stocks overseas and in New Zealand was similar to what has happened in every investment fad in history from tulip mania and the South Sea bubble through various forms of mining and South American railways to breeding goats and ostriches.

A few people produce a good idea, put it into practice, get the early profits from a new industry and keep going. The bandwagon jumpers then operate in a crowded field, often lack expertise or sufficient capital, have a low quality product or service and eventually go broke or struggle along at the bottom of the market. Thus it has been and thus it will always be.

The crowded field analogy has specific application in technology, particularly internet-related stocks where there seems some confusion between the concepts of information, knowledge and wisdom. Information is needed to gain knowledge and knowledge, hopefully, leads to wisdom, provided the elements of analysis, experience and insight are added to the mix.

Movements in the New Zealand dollar's value against major currencies, particularly the US dollar, had a significant effect on investment markets. The dollar was worth 51.92USc on December 30, 1999, but was at 40.06USc on November 20, a fall of 22.8%. That was good news for exporters and other foreign exchange earners, including companies involved in the tourism industry. It was bad news for companies reliant on imports for a major part of their inputs and/or sales of finished products.

Investors saw that, quickly bidding up prices for rural-linked stocks. Those companies also benefited from improved profitability arising from an increase in farm incomes, which in turn, were based on good climatic conditions and rising international prices in real terms before any consideration of the exchange rate.

It is a fair bet few investors would have tipped meat processor and exporter Affco to be 10th on a list of high performance stocks for 2000. The company went through substantial reorganisation in recent years, which assisted its share price, but there were certainly benefits from the exchange rate and rising international meat prices.

Exchange rate movements, international product prices and climatic factors had an impact on the share prices of Dairy Brands and Tasman Agriculture, although the latter company had a buyback of 23 million shares at $1.20 a share.

Tables II and III omit several companies that were below the percentage cutoff points but on which the exchange rate had an effect.

Air New Zealand's A shares fell 36.4% between December and November 20, while the B shares were down 30.3%, due to an expected lower profit as substantial increases in fuel costs and other inputs were prices paid are expressed in US dollars. The exchange rate will have an indirect effect on company profitability in the coming year, because the rising cost of imported goods, including oil and oil-based products, affects the inflation rate and create consumer resistance.

Pump prices for diesel and petrol were rising again in late November. Coupled with the other increases this year, they will flow through the economy in two ways: higher consumer spending on motor vehicle operating costs and a lift in freight costs. The former reduces consumer discretionary spending and the latter eventually adds to the price of goods as freight costs are passed on.

An increase in inflation as a result of those matters will see the Reserve Bank watching the interest rate structure. Inflation was 3% for the year ended September 30, but it included sizeable increases in petrol and tobacco which might be considered one-off events, although oil prices are still on the move.

The bank will review the official cash rate (OCR) this month. It raised the rate twice this year in movements of 0.25% each. The OCR is 6.5% and could go higher in December.

As noted (NBR, October 20) governor Don Brash warned about the phenomenon of stagflation in the then current situation. An increase in interest rates can underpin the other elements causing stagflation, a concept many people thought was disposed of in the 1990s.

The bank's problem is how to stop the process feeding on itself if inflation goes up, interest rates are lifted and these costs are passed on, thereby giving inflation another nudge at a time when there is price resistance to consumer spending.

Apart from the strong share prices in table II and some others not appearing there, the sharemarket had an overall dull year, but better than some overseas major markets (see article on next page). The figures for the small companies index were included in table III because concentration on the NZSE40 capital index can distort the picture, given that index's weighting with large companies.

NZSE gross indices are often used to show how investors fare over a given period in terms of total returns: capital movements plus income. That is valid for measuring returns, but the capital indices measure what the market thinks about a particular group of stocks on any trading day.

The SCI capital index has often outperformed the NZSE40, depending on the time span used for comparison. It underperformed this year, at least until November 20, going down 11.7%, compared with an 8.2% decline for the NZSE40. The 8.2% fall in the NZSE40 did not reflect that some of its stocks did much better and others much worse.

For example, Telecom is the market's biggest group by capitalisation. The share price fell from $9 at the end of 1999 to $5.75 on November 20, a decline of 35%. On the other hand, Lion Nathan's share price was $4.45 on December 30, 1999, after a share buyback had been announced. The price was $5.65 on November 20, an increase of 27%. A buyback was responsible for part of the movement in the base price but not all of it.

It was again a year of selective investing on the New Zealand sharemarket if people wanted to beat the pack. That is always the case and there is no reason to think the situation will change in 2001.

Forecasting the likely direction of markets is always dangerous, because it is impossible to build in the unknowns. The large payout for Shell Apache's acquisition of Fletcher Challenge Energy could pump money into the rest of the market but, as noted (NBR, Nov 24) it is difficult to calculate how much will flow back, given that two parts of the package involve scrip in other companies.

The New Zealand market movements will again feel the impact of what happens in other countries, particularly the US. At the risk of being proved wrong later in the year, it would be unusual for our dollar to regain all the ground lost this year. A slowdown in US growth would improve the exchange rate in New Zealand's favour and such a slowdown is quite possible.

On the local scene, government activity will influence share prices and interest rates. Corporate profitability is another obvious mover. Any poor results or suggestions of them will see the appropriate shares hit hard.

One thing can be said safely about 2001 on the New Zealand sharemarket; there will be no more fad bubbles bursting as happened this year - because there are none left.

Comments from our readers

No comments yet