Market barometer: Local market bargains loom as investors wait for decision by Federal Reserve

Friday 9th June 2000

Optimism has returned to share-
markets but there have been fickle mood shifts before over what interest rates threaten to do to shares. Today the pundits are talking the sharemarket up, yet tomorrow they may be crying it down. Much of their emotionalism is based on narrow-view snapshots of a short series of sharemarket statistics.

Economic fundamentals in the US economy will be the real drivers of share values worldwide and so far evidence of a slowing US economy is showing only a short-term trend.

The impact of high-volume Y2K stockpiling last year may have more to do with reduced manufacturing and payroll data than any widespread resolve by Americans to temper strong overall demand for goods and services. Get the Y2K stockpile shifted and jobs and orders could start rising again. The US Federal Reserve will know this, even if share dealers prefer to gloss over it.

Also yet to be extracted from any comparative economic statistical series for the past year is the unique distortion of any one-off remedial Y2K expenditure.

Much volatility can be expected over June until the US Federal Reserve makes its verdict known on an apparent slowdown in the US economy. The key concern will be forward fundamentals for shares on a basis of expected corporate activity within a higher interest rate climate.

New Zealand's sharemarket should be a bargain with limited downside. Weak share values mean higher dividend yields and price/earnings ratios, provided listings can keep profits up.

A big risk to the expectation of higher profitability is the inflationary potential of our collapsed dollar, which has been in a bear market for some time against the likes of the Japanese yen. That said, increasing odds of an upturn in the Japanese economy and flow-on effects within its surrounding client economies should generate an export-led boom in the Asian markets.

The Reserve Bank's weapon of higher interest rates in the face of an inflationary weak currency threatens to destabilise the currency further as investors foresee economic downturn following. A lower sovereign debt rating would be a possible consequence, further boosting interest rates, especially as government surplus forecasts would look flakier.

The government has a part to play in boosting confidence but its belated sympathy for the business sector smacks of crocodile tears.

The New Zealand sharemarket is a cheap buy, especially for foreign-sourced takeovers, but its prospects for an upturn are dubious. While business confidence is weakened, firms will hold back from investment and expansion needed to add asset value.

The domestic outlook for listings will be enfeebled by the lasting effects of higher taxes and mortgage rates, particularly considering $60,000-plus earners, who have been slugged with a 39% success tax at the margin, are also the mainstay of the local sharebuying class.

The government appears to have engineered a potentially prolonged bear market for local equities.

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