Volatility the big factor in sharemarket this year

Press, 11 January 1986, Page 19

Volatility the big factor in sharemarket this year

By

STUART FOSTER,

of Lawrence, Millton and Howarth, Christchurch

In predicting what the sharemarket will do in 1986, the over-riding factor is likely to be volatility. This is likely to include both upwards and downwards movements. The first few days of trading in 1986 have already shown this. This volatility is likely to be caused by a number of factors, including:

• The continuing effect of Government deregulation. • Overseas investors becoming more interested in New Zealand. This is caused by a number of factors, including the large number of New Zealand companies which have gained listing on overseas exchanges.

• Movements in the kiwi dollar, which affects investment decisions and company profitability. • Introduction of G.S.T.

• Movements in company profitability, with some

companies reporting a reduction in earnings. However, while the market is likely to be much more volatile, over all it is likely to be very strong, with some individual stocks performing very well; others will not.

In looking at the total market and individual stocks, one must be careful. It is easy to make sweeping statements on what the market as a whole is doing, which are not reflected in individual stocks. The rapid increase in the Barclay’s index at the end of 1985 and start of 1986 is an example. This bullish period is being highly influenced by three companies: Brierleys, Chase and Equiticorp. These leaders had a significant impact on the increase of the index, yet many other companies did not move in price by nearly the same percentage increase. This highlights the two-tier market that is developing. Recent statements by Mr Paul Collins, chief executive of Brierley Investments, Ltd, that the New Zealand market is overvalued are an over-simplification.

While some stocks are selling at historical highs, others are not, and most of the investment companies and corporate raiders have a vested interest in seeing the market come down.

Investment companies make money by buying undervalued assets, so they

prefer to see the price of shares below their asset backing, or earning potential.

Therefore, while the market as a whole may be volatile, not all individual stocks will be. Investors who have followed the Australian market over the years will be aware how much more volatile it has been than the New Zealand market. As our market becomes more international, then these new influences must be expected. Kiwi dollar

The impact of the kiwi dollar on the sharemarket in 1986 may be significant. If the dollar declines as interest rates ease — and many are predicting this — then this will be very positive for the sharemarket for the following reasons: 1. The New Zealand sharemarket will become more attractive to overseas investors because of the reduced cost in overseas currency to purchase New Zealand shares. More overseas money is likely to be channelled into New Zealand stocks.

2. The reverse of the above will be that overseas stocks increase in New Zealand dollar terms, which will make them less attractive for New Zealand investors. Therefore, less investment in overseas stocks by New Zealanders will be made, and much of this money will be directed back to the local market. 3. The profitability of many industrial companies will be greatly enhanced as the dollar falls. The high value of the dollar relative to other currencies will have severely reduced earnings for some companies, and this will be reflected in the coming profit announcements for March 31 balance dates. Given that the market is likely to be volatile, and the other factors already mentioned, what then is the strategy to adopt? First, investors will need to be selective in company stocks and obtain sound advice when buying. Gone are the days of selecting any stock, and watching it grow in price. Some of the 1985 floats which were flops are

evidence of the need to be selective. Second, investors should be prepared to get out of poor performers, and if necessary, take a loss. The opportunity cost of staying with poor stocks in the current market is too high. With selected stock prices moving so quickly, investors are better to focus on these and sell those which are not performing. Third, investors should review their portfolios regularly, and not necessarily adopt a buy and hold strategy. If the market is volatile, it may be that selling part of a portfolio should be undertaken. Which stocks are likely to perform well in 1986? The glamour sector of the market in 1985 was the invest- ■' ment group, and while some will not perform to expectations, the sector is still likely to perform very well in 1986. Another sector likely to perform well comprises the investment property companies. However, care is needed that the share price does not become too high in relation to tangible assets. Some property companies are selling at a huge premium, which is difficult to justify. Stocks that should perform well in 1986 include: Apex Group, Ltd — This group looks likely to expand significantly in 1986 and to move away from having a large proportion of its assets in the meat industry. Brierley Investments, Ltd — The phenomenal rise in Brierley’s price has seen it increase by more than 100 per cent during 1985. BlL’s impressive asset base provides an excellent platform for the group as it becomes more international. The shares are still good buying for those prepared to take a medium-term view, and all portfolios should contain an exposure to this stock. Capital Markets, Ltd — This newcomer via Horizon Oil NL has excellent medium-term potential, and should perform well in 1986. The Fay Richwhite merchant bank has been ex-

tremely successful and the aim of Capital Markets is to deal internationally in all types of capital-market securities, both debt and equity. While entry to the company via Horizon Oil became more expensive until the shares were suspended, the shares may represent excellent buying when they are relisted, as some profit-taking might emerge.

Owens Investments, Ltd — This group has some excellent investments and is selling at a projected price earnings ratio of 8.0 compared to the investment company sector which is averaging above 12.0. Owens is diversified among transport, engineering, and property. The prospects appear excellent and with the Owen’s family holding 73 per cent of the company, the tight scrip situation minimises downside risk.

Renouf Corporation, Ltd — This investment merchant bank has performed well since it was listed. The group’s operations include investment banking, corporate finance, equity investment, money market trading, property investments and futures trading. The group has just arranged a ?US2OM Euronote issue with the funds to be used as working capital. The Renouf name is becoming more international as the group expands.

Smiths City Market, Ltd — This diversified retailer has excellent potential. The group which has excellent management, is planning further expansion to the North Island, but the group is being very selective as to the manner in which this is achieved. Recent acquisitions already ensure a total South Island coverage, and the introduction of G.S.T. will increase retail spending. The shares are very reasonably priced. Over all, the prospects for 1986 appear excellent, but the variation of performances of individual stocks will be great. Investors will need to ensure that they select growth stocks, and move out of stocks where the outlook for profit growth is poor.