BROKER COMMENT Where to next asks broker

Press, 21 November 1987, Page 28

BROKER COMMENT Where to next asks broker

By

PAUL O’NEILL,

Manager, Marshall Equities, Ltd

The New Zealand sharemarket continues to dither around the 2200 mark on the Barclays share index, closing at 2162, down around 58 points for the week. Major reasons for the inactivity are the conflicting signals being sent to investors, fundamentals suggest a buy, while sentiment remains influenced by the offshore markets, particularly as results are eagerly awaited from the U.S. budget deficit talks. A compulsory cut of SUS 23 billion is due to be automatically implemented on Friday U.S. time if talks break down. The market, however, is still looking towards a S3OB deficit. Such a figure would go a substanial way to restoring world market confidence. Any delay in implementing such cuts will result in an immediate downward movement in markets as confidence is lost.

Volumes traded are very light, reflecting the uncertainty. Sellers and buyers are reluctant to commit to action due to the importance of the budget talks. Positive factors which suggest we may be nearing a bottom in the fall are, the improved economic indicators starting with the improved U.S.

trade deficit recently announced of SUSI 4 billion, an improvement on prior figures. Locally the Reserve Bank in New Zealand has followed offshore moves to ease liquidity in money mrkets to smooth the effects of the share market fall whih has dampened inflationary expectations. The result has been an easing of long-term bond rates over the last week. Interest rate sentiment is bullish medium term, and the downward trend in interest rates is intact. The effect of this is to move bond yields and dividend yields into closer alignment make shares a more attractive investment, dividend imputation in the future will further improve this attractiveness. Fundamentals such as price earnings ratios and net tangible asset backings are also attractive. A recent well publicised ex-

ample is Renouf Corporation, which after taking it all on the chin stil manages an asset backing of $1.30 against a recent share price of 60 cents. Such situations must stimulate corporate activity as cashed up companies pick up cheap assets. Price earnings ratios are now operating five times on a prospec-

tive basis and around eight times historically. A study of history also shows that markets rarely fall by more than 50 per cent without at least a short interim rally, the New Zealand market now approaches this figure on today’s Barclays figure having fallen around 45 per cent from the record high. Negatives still tend to be sentiment driven, as previously mentioned. Fundamentals are ignored by nervious investors, and direction is taken from offshore. This offshore influence is likely to weaken in the future as the major offshore investors have mainly divested themselves of New Zealand shares, licking their wounds and heading home to shore up home markets. As a result the New Zealand share market will become more insular and domestic influences on future move-

ments will be greater. Investors should note that although sentiment is currently “king,” fundamentals ultimately rule. A final piece of market wisdom. The market view is that some think it goes up, some think it goes down, we agree, act immediately, whatever you do will be wrong. Good luck.