THE MARKET Roller-coaster ride in nervous trading

Press, 12 October 1985, Page 22

THE MARKET Roller-coaster ride in nervous trading

By ADRIAN BROKKING The New Zealand sharemarket went for a rollercoaster ride this week, starting off on the first two days with a battering in which Barclays’ index of industrial shares lost more than 50 points, and then staging a modest rally in the next three days which recovered 20 points from the loss. As the index had fallen some 56 points the previous week, and another 100 points in the six or seven weeks before that, by Tuesday the index had given up

almost three quarters of its gains since the beginning of the year. Last night the price level as measured by the index was 6.4 per cent higher than the opening level of the year, compared with a gain of about 19 per cent at its all-time peak In the first week of August. Clearly, the chartists who were saying in the middle of August that a major trendline had been broken on the downtrend (an event that predicts a sharp reversal in chartist language) have been proved right.

However, it is probably appropriate to point out that there is an element of "self-fulfilling prophecy” in chartists’ predictions: if enough people believe and act on the prediction, it is bound to become true. Most chartists believe that the market is in a prolonged downtrend, simply because the charts have told them. Analysts and market watchers who judge the market by “fundamentals” have felt for almost a year that the market was too high. Many fundamental factors have been pointing downwards for some time, but some technical factors, such as the extremely highinterest rates available in the fixed-interest securities market, are having their effect.

One of the questions weighing heavily on investors’ minds is how much higher the New Zealand dollar will go and for how long it will stay as high as it is.

Exporters are not pleased with the level of the New Zealand dollar, and have been complaining loudly, asking the Government to intervene. This is rather naive, and also raises four points: first, experience overseas of floating exchange management has shown that Reserve Bank Intervention is but seldom effective, second, it just goes to show that Business with a capital B is as little interested in a free market economy as the Unions are, third, the New Zealand dollar is still below, its predevaluation price, and last but not least, a substantial devaluation of the New Zealand dollar would add substantially to inflationary pressures. But there were also saner voices.

The Auckland Chamber of Commerce said that “a devaluation of the dollar in isolation would represent unwarranted interference by the Government in the economy. It would lead to increased inflation and this, plus the inflationary impact of the goods and services tax in 1986, would obviously kill any export competitiveness that remains.

“The chamber questions the advisability of exporters putting a hand out to Government for aid when it is

that aid in the past that has lulled industry sectors into believing they are competitive.” However, the chamber urged the Government to “ease the pressure a little” on the money supply, to bring down interest rates. Bringing down interest rates, even if it were not interference in the economy, would probably lead to a fall in the value of the dollar. Supply and demand are two sines of the same coin, and in this case a decrease in borrowing offshore by New Zealanders and a staying away of overseas borrowers from our shores would have that effect. ‘ !l Another question bearing heavily on the market is the current wage negotiations. The Government, naturally enough, puts the most favourable interpretation on the inflation figures, and would like to hold them out as a good reason for wage restraint. Most market watchers tend to become cynical in the course of their experience if they did not start out that way, and most are well aware of the proverb that one swallow does not yet make summer. Union secretaries are probably just as hard-hearted. Some of the wage settlements already made are very high, and are a severe threat to the economic policies of the Government. If the Government holds fast, and also frees imports, it would prevent the "unholy alliance” that in the past assured a relatively high level of industrial peace by simply passing on high wage increases into higher prices. That would mean, of course, that employing firms granting high wage increases will be squeezed. At best, it will adversely affect profitability, at worst it will mean loss of jobs and company failures. In that case, bliss would be to be an importer. If, on the other hand, the Government were to take fright at that particular scenario, and were to ease up bn its tight monetary policy especially, it would undermine all possibility of change, and' put us right back on the path that has led us to.our present predicament. ■'!