The O'Brien Column: Signs of bullish market emerge but more false dawns unwelcome

Friday 26th January 2001

A 6.9% rise in the Stock Exchange's top-40 capital index since December 27 has brought a new herd of bulls to the local investment scene from wherever bulls spend their summer holidays.

The December 27 date was used, because it was the day the index closed at 1867.85, its lowest level for more than two years.

Its low in 1999 was 2015.4, on September 28 of that year, which was 0.9% higher than the 1997.04 recorded last Friday.

The supposedly wonderful market performance this year was attributed in some quarters to the recent improvement in the dollar's value which went from a US38.95c low in October to US45.22c last week, a gain of 16.1%.

While it is clear that a gain in our dollar had a spinoff off for investment, it should be remembered the currency was worth a few points under US52c at the end of 1999.

A 14.8% drop in the currency in about 13 months to last week had to be balanced against the 16.1% lift since October and showed the New Zealand dollar was still weak.

There was an interesting his-torical quirk in the latest relationship between our dollar and the US currency, because the exchange rate last week was similar to that ruling just before we floated in March 1985.

A lot happened in the intervening 15 years, including recessions and booms in the US and elsewhere and the 1987 worldwide sharemarket crash, but in absolute terms we were last week back where we started from in relation to the currency.

Investors seem to have a psychological problem which makes them enthusiastic about a step forward while forgetting the previous movement was two steps back.

The reference to 1985 could be risky, given the changes in other economic indicators since then, so it is appropriate to look at comparative figures.

CPI inflation was 4% in the year ended last December, outside the Reserve Bank's target of 0-3%, due to one-off matters and the official cash rate was 6.5%.

The real interest rate - based on the return available on a registered bank 12-months retail deposit rate of 6.2% - was 2.2%.

Things were more than "somewhat different" 15 years ago. Inflation in the March 1985 quarter alone was 4.4% and hit 16.5% in the year ended June.

Banks and major finance houses paid up to 20% on 12- months deposits, leaving a real rate of 3.4%.

Both "real" rates ignore the effect of taxation on the net return and that tax rates changed drastically over the years.

Matters were also different in the New Zealand sharemarket. The then Barclays index increased 10.3% in the six months ended June 1985.

Comparable movements for a selection of companies (some of which could start "I remember" reminiscences) on an issue-adjusted basis for the same period were: Alliance Textiles, + 28.6%; (most of the gain after the then government rejected an Industries Development Commission's recomm-
endation to allow duty-free imports of fully-made-up garments, a position reversed in later years); Brierley Investments, +39.1%; Cable Price Downer, +41.8%; Ceramco, +53.5% (when did that last happen?); Emco (the motor vehicle company), +36.78%; Equiticorp (wait for it), +50%; INL, +30%; L D Nathan (before a couple of reorganisations and name changes), +20.2%; National Bloodstock, +34.1%; Progressive Enterprises, +26.2%; and Smiths City Market (as it then was), +23.6%.

Fear of inflaming the entrepreneurial hot blood of today's crop of wheeler-dealers suggests it would be inadvisable to spell out what happened in the ensuing two years.

Such historical diversions put the current enthusiasm for the sharemarket into perspective.

There were good gains since the end of 2000 but that view should be tempered with the realisation that prices came off a depressed base.

Telecom was the best example. The telecommunications stock sagged to a six-year low when trading opened this year, trading at $4.50, before closing January 3 at $4.58.

It closed at $5.68 last Friday, a gain of 24% since January.

The company's market capitalisation accounts for between 18-20% of the total, depending on price fluctuations at any time, so it was hardly a major deal to see the top-40 capital index rise 6.9% since the end of December.

That does not deny useful gains in other stocks, particularly the power utilities, DB Group, some ports, Baycorp and special situations.

The New Zealand sharemarket does not need false dawns.

There have been too many of those, usually the fault of brokers who need to build up market confidence so percentage brokerage translates to higher dollars.

Private investors would do better to realise that New Zealand and the world face problems this year.

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