BROKER COMMENT ‘N.Z. now part of international market place’

Press, 23 January 1988, Page 30

BROKER COMMENT ‘N.Z. now part of international market place’

By

M. J. M. SIDEY,

Last year will be remembered as one of the most volatile years in sharemarket history. The events left New Zealand investors in no doubt that we are now part of the international financial market place. After the weakness which prevailed in our market after October 20, respite over the Christmas holiday period was eagerly awaited. However there was a concern that the trading period between Christmas and New Year could have seen a renewed wave of selling. This could have been exacerbated by the very low trading volumes in our market during this time. However, this selling pressure did not eventuate, and our sharemarket remained relatively steady. This stability was surprising given the events which were happening abroad at the time, not the least being the weakness in the United States dollar. Concern over the burgeoning United States trade deficit caused European and Asian money markets to sell the Unitted States currency down against the yen and Deutschmark to post-war lows. This in turn ended a two-week pre-Christmas rally on Wall Street. The United States trade deficit and the surpluses of Japan and West Germany will be the main factors most likely to affect the direction of the financial markets during 1988 and 1989. The imbalance between leading nations’ economies heavily influences the stability of the United States dollar. Instability of the dollar creates uncertainty in the market place, and this has a flow-through effect to world sharemarkets. There have been a number of encouraging signals from abroad during 1988. The Group of Seven industrial nations (G 7 appear to have agreed on central bank measures to support the United States dollar at about 125 yen. The November United States trade deficit showed a 25 per cent improvement on the preceding month. The markets now eagerly await the December

director, Forsyth Barr, Ltd

deficit figures in an attempt to analyse whether the trend has been reversed conclusively. In New Zealand, investor confidence received a further setback over the recent holiday period. Several broking firms have been declared defaulters and this week we have seen the fourth listed investment company placed in receivership since the October crash. Although this may seem an inauspicious start to the New Year, the news of the receiverships must be viewed in perspective.

There exist certain similarities between the four failed companies — Investment Finance Corporation, Ltd, Strategic Capital, Ltd, Leverage Investment Corp., Ltd, and Charter Corporation, Ltd. Generally all are investment related and are characterised by an exposure to the equities market and thus suffered in the October fall. Further, the companies have tended to operate on short-term borrowings and generally have low base earnings (in large part because of low income derived from equity investments). With the fall in the value of those equity investments it has become difficult for many companies to obtain longer term credit lines as neither cash flows nor the reduced value of the security can justify such debt restructuring.

On a positive note a large number of companies have come through the crash relatively unscathed. Many companies with little or no equity exposure have been treated by investors with the same disdain as those with significant equity holdings.