'Fear factor' hits US markets first

By Chris Hutching

Friday 12th July 2002

Fund managers are bracing for reaction over the next couple of weeks from investors who are due to receive poor June-quarter results from managed funds that are exposed to international equities.

Anthony Quirk, managing director of Guardian Trust Funds Management, which deals with wholesale accounts for group investments and superannuation funds, said many of them would be hard- pressed to maintain the payouts of recent years.

"At times like this people tend to look at their investment portfolios and review whether it's appropriate for them to have their money in shares."

He said a "fear factor" had become apparent among US investors.

"Last year was bad but this quarter has been ugly, especially June, when we've seen a fear factor in the US that we haven't witnessed before."

Mr Quirk said it arose from the damage to the reputation of corporate America from the Enron and Worldcom scandals.

"Usually we worry about market cycles but this is more than that. It seems to be similar to what we experienced in New Zealand in 1987.

"There seems to be a major shift in mindset that has the potential to be more significant.

"Often markets are due to recover when sentiment is at its most negative but we've seen that even the rival companies most likely to benefit from the demise of Worldcom have also been marked down."

He said the markets had shrugged off President Bush's reassurances, particularly when it looked as if he might block tough new corporate legislation being proposed by the Democrats.

Mr Quirk is tipping a degree of recovery for US markets in the second half of the year but also expects more volatility from negative news.

"The New Zealand market has held up well through all of this because of the lower currency and an economic cycle out of sync with the rest of the world but that will come to an end soon as the currency strengthens and commodity returns fall," he said.

"At that point we will become more dependent on the world economic recovery. One of the most encouraging signs is Japan, which seems to be coming out of the doldrums."

Financial planner Katrina Hawker, of Capital Financial Planning, said some clients required more assurances than others and it was a matter of reviewing their aims for their investment portfolios.

Hedge funds were proving their worth and New Zealand property was providing steady returns for many investors.

Craig Stobo, of BT Funds Management, said he was expecting reaction from financial advisers and investors and the company was providing as much information and reassurance as possible to the local market.

BT emphasises the cyclical nature of markets and the benefit of staying with investments over the long term.

Bearish investment adviser Charles Drace, of Christchurch, predicts the Dow Jones index has yet to lose another two-thirds of its value and usher in a 1930s-style depression.

But he admits the timing of each wave is difficult to determine.

He said he began warning clients about a pending US market meltdown in 1995.

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