Market in grip of fear and uncertainty

Press, Volume CXI, Issue 32561, 22 March 1971, Page 20

Market in grip of fear and uncertainty

(By our commercial editor)

Millions of dollars were wiped off the value of New Zealand shares last week, when selling pressure and lack of buyer interest combined to push the market into a steep decline. In fact, Thursday and Friday together would rank as two of the worst days on record.

The Financial Research and Management index fell 7.8 points, to 272.40 representing a decline of 2.8 per cent during the week, most of it in the last two days. The index needs to fall only 15 points further—a matter of some two weeks time at present rates—and the market will be right back to where it was six years ago, in March 1965. The most casual glance at the list of rises and falls for the week, printed on this page, is enough to appreciate the state of the market. A comparison with the 37 selected market leaders, printed in the box below, underscores the dismal picture: during the week 16 New Zealand and two Australian leading shares reached new lows for the year, and four more New Zealand shares are exactly at their lowest level. Some of the shares which were most popular earlier were the hardest hit: Harvey lost 30c to 375 c, Feltex lost an equal amount to 315 c, and Tasman was marked down 25c to 280 c.

Insurances were punished, with 10c falls by New Zealand and South British, and a 20c drop by National. Fletcher and New Zealand Refining also lost 10c, and N.Z. Forest Products finished the week with the same loss, after recovering sc. There is not much point in further embroidering the gloomy tableau; suffice it to say that market performance was very bad indeed.' Dividend tax? The fact that share prices dropped sharply in a week in which Professor G. J. Schmitt, professor of management studies, at Waikato University, predicted a further sharp fall in the market, should be regarded as a coincidence, for reasons I shall give in a moment. The professor thought that a further slump in share prices was likely when the impact of the dividend tax came to be felt by investors, say about June or July. Sharebrokers, market analysts, and financial commentators are virtually unanimous in disagreeing that the dividend tax was still having any great effect on the market, or would have much effect in the near future.

The good professor is a little condescending if he thinks that the country’s investors cannot see further than their noses. They have known about the tax for a long time, in fact ever since the Budget, and the tax has long since been discounted, at the same time as a number of other factors were also discounted. These adjustments may perhaps continue, but certainly not to the extent envisaged by Professor Schmitt. Capital gains And a further point is that few people are buying shares purely for income—and therefore few people will be greatly affected by the tax. Perhaps* the main purpose of investment in shares these days is to protect one’s money from the eroding effects of inflation, and in the long run to make some money. Return on investment is only a minor factor in this goal. Moreover, insurance companies and pension funds—a substantial part of the market—do not .pay the dividend tax. These institutions are not normally sellers of stock, and even if they had to pay tax, it is unlikely that an increase would lead them to sell. Now it might be said that

perhaps enough people were convinced by Professor Schmitt’s argument to induce them to sell. To that I can only say that if it were true, then the sharemarket is in very poor shape indeed. But the market lately has shown a few sharp falls without any speculation about dividend tax.

It must regrettably be conceded that the market is likely to fall further, but I think that the dividend tax plays only a minor role. The biggest factors undermining the market are on the technical side rising interest rates, the squeeze on investable funds and to a lesser extent the supply of scrip, and on. the psychological side the uncertainty of New Zealand’s future, and the lack of faith of investors in the Government’s ability to solve the country’s internal problems. And if I were allowed only one guess at the reason for last week’s sharp fall I would say that the cause was the Government’s capitulation on the Stabilisation of Remuneration Bill, together with organised labour’s attitudes as evidenced by the industrial unrest.

Not that the bill was much good—l am of the firm opinion that it would have solved little —and the amendments cannot make it worse. The bad feature of the Government’s action is that a frightened and disillusioned country has learnt once again that this Government will not take a stand on anything—raising grave doubts whether it knows where it is going. Nothing wreaks more havoc in sharemarkets than uncertainty. This is not a political column, but economics and politics often dwell closely together, and therefore J may perhaps be forgiven for pursuing this point. The weakness of the mar-

ket is in part bound up with politics. Recovery would be assisted immensely by a narrowing of the credibility gap. -This country is yearning for leadership. There may be a time and a place for “consensus politics,” and “leadership from behind.” But surely that time and place is not New Zealand today. Lindeman profit The directors of Lindeman (Holdings), Ltd, report that despite a 12.9 per cent increase in sales, group profits in the December half-year show no variation on the previous corresponding result. In arriving at the group profit for the period all developmental expenses had been written off.