Australia looks best overseas bet for Kiwi punters

By Peter V O'Brien

Friday 1st March 2002

New Zealand-based investors who took positions in overseas markets last year had a tough time.

The situation did not improve much in the opening months of 2002, with the exception of equity investment in Australia.

Table I shows the movement in US, Asian and Australian sharemarkets from the beginning of last year until February 15. The percentage downturns in the Hong Kong and Japanese indices and the technology-oriented Nasdag indicator in the US showed what happened for most of last year.

In December NBR Personal Investor looked at movements in various markets from the end of 2000 until last November. The Dow-Jones fell 8%, the Nasdaq 22.6%, Hong Kong's Hang Seng 24.5% and the Nikkei 19%.

There were continuing falls from November 26 to February 15, excluding Australia's all-ordinaries index, which continued the positive performance apparent throughout 2001.

Much was made around the world of the effects of September 11 on financial markets but that was only part of the reason for Asia's generally dismal performance.

China was an exception but few New Zealand private investors would be participating in that country's economic growth, unless they invested in a developing-market managed fund that had strong weightings to China.

Personal Investor last considered the question of investment in Asia two years ago (March 3, 2000).

It was noted then that Asian markets had bounced back after the massive shocks of the economic meltdown in the late 1990s but the lack of substantial structural change suggested problems could continue.

Japan's Nikkei index closed 1999 at 18,934, an improvement of 36.7% over the year, and put on another 4.6% in the ensuing two months. The Hang Seng index in Hong Kong went up 68.8% in calendar 1999 and 1.45% in the two months ended February 2000. It was 17,201 on February 25 2000, while the Nikkei was at 19,818 on the same date. Both Asian indices are now below their "recovered" positions of early 2000.

Reaction to September 11, particularly as a flow-on adjustment to Wall Street's downturn after the general deterioration of the US economy, was partly responsible for the Asian markets' performance.

Too much emphasis can be put on the terrorist attacks. The US economy was in difficulty well before September 11, a point noted when the Federal Reserve cut interest rates 11 times during the year.

US data for the quarter ended September 30, which included only 19 days of post-September 11 reactions, showed the economy had its biggest downturn in 10 years and company earnings were down for the fourth successive quarter.

Federal Reserve chairman Alan Greenspan gave market confidence a boost at the end of January when he told Congress he saw signs the recession was ending. He said the rundown in unsold industrial goods would help improve production, which had fallen for some time.

That was fine in the context of the US economy but other matters affected Asia.

The Japanese banking industry was identified as a major factor in Asia's economic crisis in the 1990s, although strange financial and accounting practices in Korea were not far behind.

Nothing seems to have changed in the outlook for Japan, although there are signs recently the government is preparing to tackle the country's deflation and the substantial bad loans carried in banks. The loans tend to be rolled over, because acknowledging their doubtful or bad status could result in some banks being forced to admit insolvency.

Japanese investors in mid February were hopeful a US-Japan summit would assist markets through decisions about dealing with deflation and the banking problems.

New Zealanders who want involvement in overseas equity markets must decide whether to participate directly or indirectly through stakes in managed funds. Few individuals have the time, knowledge or, in some markets, the necessary funds to enter international equity markets on their own account, with the exception of Australia and possibly the UK and US.

English is the language of commerce in many countries but systems can differ from those in English-speaking markets and assessing companies often requires specialised expertise.

Investors tend to use managed funds or to deal with brokers who have, or can access, trading offices in the target markets.

Plenty of avenues are available to private investors to ease their entry into foreign markets. They range from the many managed funds listed in NBR's share tables, specialising in regions and/or individual countries, to New Zealand brokers who are part of international networks.

Dealing in exotic markets is difficult enough in these volatile times without individual investors adding to their problems through a necessity to immerse themselves in crash investment education programmes.

The issue of dealing with different systems has acquired greater significance, although perhaps indirectly, from the recent US revelations of funny goings-on in corporate accountancy departments.

New Zealand investors should remember that the saga of energy trader Enron has sapped the confidence of US investors. Accounting practices go to the essence of corporate activity.

While practices in some Asian countries and the developing markets have been overhauled, some areas still would not get approval from a competent western auditor.

Working a tortuous path through such mazes should be left to people with "on-the-ground" experience. It is not a job for amateurs, unless they have a taste for unnecessary risks to add to those inherent in any equity investment. Even professionals can have a difficult time dealing in volatile markets, particularly those classified as "developing."

Many political, economic and financial issues could affect international financial markets this year but a New Zealand election will not be among them. Our parliamentary election is, in international terms, the equivalent of a city council election in a moderate-size city.

The US has elections in November for the House of Representatives and a third of the Senate. Their outcomes could affect international markets if the results are perceived as indicating a shift in the country's internal or external economic policies.

The general consensus, as far as one can be assessed, for international investment this year is that the US and European economies are recovering slowly and Japan will remain sick unless long overdue and far-reaching policies are adopted. The rest of Asia should do reasonably well, subject to any fallout from having Japan as a neighbour.

Australia seems likely to continue on its improving path, an almost stubbornly different trend from other economies and financial markets in recent years. Most New Zealand individual investors would find Australia the most comfortable investment market outside their home base.

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