Signs of an interest rates hike if house building takes off

Peter V O'Brien, Finance writer

Friday 18th January 2002

Sharemarket indices (Rounded)

Index	31/12/01	12/1/02	% Change

NZSE 40 Capital	2053	2113	+2.92
NZSE SCI Capital	5722	5820	+1.71
US: Dow-Jones	10021	10067	+0.46
US: Nasdaq	1950	2047	+4.97
US: S & P 500	1148	1156	+0.69
Aust: All-Ords	3360	3360	nil
HK: Hang Seng	11397	11166	-2.93
Japan: Nikkei	10543	10442	-0.96

The current year on the New Zealand sharemarket continued the 2001 experience, with our indices outperforming other major markets.

New Zealand stocks performed better last year than those of the US, Australia, Hong Kong, UK and Japan, a point noted in NBR Personal Investor's review of 2001 (Dec 7).

The trend continued in the period from December 31 to last Friday, as shown in the table, although the Nasdaq index (one of three US indices) did better than New Zealand's market indicators. The NZSE small companies index (SCI) was included as well as the 40 capital index, because a solid price improvement for Telecom shares this year distorted the heavyweight's index.

Telecom closed 2001 at $4.98 but was $5.45 last Friday, a rise of 9.4%.

The telecommunications stock accounted for 22% of the NZSE 40 index last week and its 9.4% price rise since December 31 was responsible for most of the 2.92% change in the index. A 1% improvement in the SCI capital index in the same period was a better indication of the market's broad strength and also of New Zealand-based investors' confidence at the start of the year.

Small companies have relatively few shares on issue when compared with heavyweight stocks and often have less market liquidity, thus making them unattractive to overseas-based funds.

Several fancy analytical theories were advanced this week for Telecom's strength but there was little in the stock's fundamentals to warrant the recent run. The old supply/demand phenomenon seemed the most likely reason for the solid gain.

It is far too early to assess how markets will perform for the rest of the year, irrespective of unexpected events affecting prices, as happened after September 11.

The US market is unsteady, due to uncertainty about the state of the economy and the timing and strength of any recovery. US investor confidence was not helped when Federal Reserve chairman Alan Greenspan made bearish comments last weekend.

European and UK officials and commentators are picking a mid-year recovery for what is now termed the "euro zone" economy.

The European Central Bank (ECB) has forecast euro-zone growth of 2-3% by the end of the year, on an annual basis, with a range of 0.7-1.7% during 2002.

Different pressures and favourable matters in particular regions and individual countries show there is no overall worldwide pattern in investment at any given time, although developments in the US always have spinoffs to other markets.

Back in New Zealand there are signs of a possible rise in interest rates if a spurt in housebuilding and a consequent flow-on to existing housing stock, particularly in Auckland, increases inflationary pressure.

People south of Auckland regularly moan about how official action to curb excesses arising from our biggest city's boom/bust cycles affects activity in areas which have less violent fluctuations.

Moaning has little effect, because changes in an area with about one-third of the country's population and a higher proportion of its economic activity eventually have a national effect.

The effect can be disruptive if people do not see changes coming. In that context, it was interesting and amusing to hear a relatively senior, Auckland-based member of a major bank say in mid-November the housing market was dead.

He had transferred his assessment of Auckland's situation to a national stage but did so when a surge in activity was underway.

Interest rates are low, relative to the recent past, so there is room for some increase before their movements affect the equities market.

Effective completion to a euro-currency in the EU was the other major feature of the period since December 31.

It is unlikely to have an influence on share prices, apart from some lift in general economic activity as the hoarders (usually tax evaders) continue to swap previously hidden caches of national currencies for euro cash before the end of February when the notes and coins of 11 countries will lose their negotiability.

Travellers, including New Zealanders, will benefit from a common cash currency, as will consumers who do not need to exchange currencies.

There will be a minimal effect on financial markets. They do not use cash and have used euros in the billions since their introduction in 1999.

It is possible some psychological boost from a common cash currency could support European economic activity but greater forces than new notes and coins influence economies.

New Zealand investors will hope the new start to their 2002 year will continue for at least the next 11 months.

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