The O'Brien Column: Uncertainty rules markets but some local stocks prove resilient

Friday 28th September 2001

The last trading day of the third quarter could be an interesting time on the world's sharemarkets as traders and fund managers close their books.

New York's decline in the days after the terrorist attacks was 14.3% in terms of the Dow Jones industrial average. Although a drop of 1370 points seems large it needs to be considered in percentage terms, given the high base from which it was struck.

The Dow Jones plunged 508 points on October 19, 1987, taking the index down 22.6 but the loss in dollar terms was obviously less than last week.

Markets detest uncertainty and uncertainty was in command of share prices last week and up to the time of writing.

The New Zealand market shared in the international downturn but several individual stocks showed good gains since the end of last year.

Mooring Systems had the best performance, if very low priced shares were ignored, improving 125% from December 2000 to the end of last week, although most of the improvement came in the three months ended March.

Tasman Agriculture went up 88.5%. There were substantial structural changes in the corporate dairy farmer during the year, including sale of its farms and large special distributions to shareholders.

The preliminary report for the year ended June 30 said management was reviewing the group structure and capital requirements to determine the "optional structure and potential amount of funds available for distribution to shareholders."

Strong performances came from other companies associated with rural activities.

Wrightson gained 75%, Reid Farmers 54.7% and Dairy Brands 57.1%. Software of Excellence, which provides electronic patient records for dentistry, went up 68.4% and was the only technology company among the 10 best performers, again ignoring percentage gains for groups whose shares sold for only a few cents in both December and September.

Chief executive Paul Weatherly told the annual meeting in August the "name of the game" for Software of Excellence was to be the largest supplier of electronic patient records systems for dentists in selected markets. Mr Weatherly said being the biggest by market share was very important.

Recent erosion of overall gains since December was seen in Fisher & Paykel's share price, which was $12.31 last week compared with the year's high of $14.60 and a low of $7.80.

The company is proceeding with plans to split off the healthcare division and list it in the US but said it was monitoring events in that country and would respond if necessary.

Market sentiment about the stock was unfavourable after the company detailed its proposal and what shareholders could expect to get on completion of the spit. The price immediately fell but the drop was also two days after the terrorist attacks and there could be some uncertainty on how the US market reacts to the healthcare division initial public offering.

Fisher & Paykel's shares last week were still 60.4% higher than in December.

Other companies were much lower than at the end of 2000, with Air New Zealand's A and B shares showing spectacular slumps, the former down 79.7% and the latter 86.4%.

It was notable that five of the 10 biggest falls were in stocks that appeared in a similar list for the first quarter. They were Renaissance (-62.6%), Otter Gold (-58.8%), Genesis (-53.9%), Retailx (-50%), and Scott Technology (-47%). The others in the 10 biggest falls list were Advantage, down 75.4%, Force Corporation, down 72.9% and GDC Communications, down 52.3%.

Bearish sharemarkets are a common reaction to political, economic and military uncertainty/crises and have always been the paradoxical reaction of otherwise highly intelligent people who operate as professionals in the securities markets.

Paradoxical or not, the current situation has a much wiser impact than its effect on professionals. The professionals manage money for thousands (millions in overseas economies) of individuals who have their savings invested in security markets through managed funds.

Widespread selling as a result of uncertainty and crises feeds on itself, pushing values even lower, until the adverse reaction to events is exhausted.

That was expressed in more colourful language quoted in a Reuters report from New York and published in the New Zealand daily press.

"We are boxing with a ghost. The market is oversold but there is always an intangible factor to stock prices and an irrationality that they can reflect. You have to let it run its course."

We do not know how long the course is, either here or overseas.

It is certain the course will be run, as it has always been in every other uncertain time, even when recessionary pressure from cyclical factors coincided with political upheavals and the threat, or actuality, of war.

There is nothing more certain than certainty and recovery will eventually replace uncertainty.

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