Broker praises Caygill

Press, 17 December 1988, Page 30

Broker praises Caygill

“Any discussion during the last three months about the political stability has had people shaking their heads, and looking into their beer,” said Mr M. J. M. Sidey, Christchurch director of Forsyth Barr, in a comment on this week's share trading. "When the discussion moved to the removal of either David Lange or Roger Douglas, 99 per cent believed Lange would have to go. It was generally agreed that if Douglas went the country would lose its credibility and its direction. The effect of this would be immediate. Short-term interest rates would fall as people gained

liquidity; Government Stock yields would be very bearish, and rise as sellers dominated; our currency would fall dramatically as oversees and local investors tried to get out of this country and moved to one with a safer, more stable, government; and the sharemarket would fall because confidence would be gone.

“What we have seen in effect is the result of market conditioning. This is where the lead time to an expected decision or challenge being made has given the market time to anticipate and prepare for that inevitable announcement.

“All credit must be given to the new regime for the calm transfer of responsibilities to the new Minister of Finance, Mr Caygill. In the very short term overseas and local markets have observed and decided that they believe the new Minister of Finance when he announced business as usual. He has advised there will be no blowout in the budget deficit; and that Government spending cuts will be put in place as previously planned. He has also advised that the tax structure will not change and the sale process of State-owned enterprises will continue. If we are to believe what David Caygill is telling us (and there is no reason why we should not) then we can conclude that the differences between Douglas and Lange were purely personal and not idealogical. Time will prove whether this statement is correct. "Perhaps the reaction to

the removal of Douglas gives us some indication as to what will happen in Japan when Emperor Hirohito dies. Market commentators worldwide are reluctant to stand up and make a statement that either this or that will happen. However the Emperor has been ill for quite some time, and Japanese institutions and investors have had time to adapt to the fact that he will not live forever. This long lead time may well bring about a softer landing than was originally expected when he first fell ill. The level of reaction, of course, is important to world markets because the Japanese economy is seen as a major stabilising influence.

“The performance of equity markets worldwide (except Japan) has been nervous. The Australian announcement yesterday that their budget deficit for November was almost twice that expected is a cause for concern. Immediately interest rates moved up one percentage point. The reason for this interest rate rise is to tighten consumption and discourage borrowings by making money more expensive. In this way the Government aims to reduce inflationary expectations and take inflation out of the system. We have seen this process in New Zealand over the last two to three years. It appears that the Australian problem may be mirrored in the United Kingdom and the United States. In the United Kingdom already interest rates are very high. In

America interest rates have been reasonably steady, but it is expected that to discourage imports the Federal Reserve will increase the rediscount rate.

"With higher interest rates in Government bonds and sound company debentures, funds get redirected from equities and property investments. This is logical because high interest rates create uncertainty in business and margins are squeezed further. These rates particularly affect some property companies and ultimately their balance sheets. Borrowings have often been made against what now seems high property values. As the property value declines, the debt does not end so that gearing within the company increases. Those companies which have incorporated properties in their balance sheets at high values then find their gearing starts to look too high as property values decrease.

"For the private investor the higher interest rates offer an attractive alternative to balance their portfolio. This message has been preached by this column for twelve months, and it continues to stress this preservation of capital aggressively. That is not to say investors should immediately sell out of all equities. What is meant by this statement is that investors should have a balance between equities, fixed interest, and property,” Mr Sidey said.