Rock bottom? Experts plumb the depths
A golden rule of investing is never to try to pick the bottom of the market. Nevertheless, it is a nagging question for punters. The Press asked four financial experts for their opinion. Aaron Hing We will not be able to tell whether the bottom has passed for the financial markets until some more time has passed. The US sharemarket’s fall from its peak in October 2007 to its most recent trough in November 2008 was a staggering 47 per cent. Two months on, the market is up around 10 per cent, and still fluctuating quite markedly from day to day. What we can be sure of at the moment is that this is not a market top so for those investors with an investment horizon beyond five years, any buying they do during the current “bottoming process” is at prices with a big “40 per cent off” sale sticker attached. Around the world, unemployment is rising, corporate revenue is under pressure, interest rates are plunging and the vast majority of countries are in recession or will experience a recession in 2009. At some point the immediate outlook for financial markets and economies will detach as investors anticipate a coming bottom in the economy.Markets usually rise in anticipation of an eventual recovery in corporate earnings and commodity prices. It is not unusual for financial markets to have rallied 20-30 per cent off their lows by the time the economy hits its bottom. So the real question is, what is the timing for the low point of the
economic cycle? Late 2009 at the earliest seems to be a conservative estimate for the economy to hit bottom, which supports an investment strategy of averaging progressively into the financial markets now in search of bargains.
Prediction is a very risky business, even more so when the markets are gripped by a state of panic. However, Mercer sees potential opportunities for investors who can sleep at night and are sanguine about the future. The current pricing of a wide range of assets is being driven by investors being forced to sell assets to reduce debt or by the requirement to re-finance. A strong case can be made that assets are oversold and represent good buying. “Rational” pricing models such as price earnings, dividend yields and asset backing support this argument. Governments and central banks have embarked on a programme of massive fiscal stimulus and monetary expansion. While the bond markets seem to have priced in a 1930s-type depression, actions taken to date by governments and central bankers indicate they will do everything possible to avoid the mistakes made then. The global economic situation is dire, with most developed economies in a recession or on their way to one. A collapse in consumer demand will put pressure on earnings. The credit crisis is still with us and provides real concern. High-profile company collapses in 2009 would not be a surprise. If the Chinese economy contracts more than expected, market sentiment will worsen. As the market is in a state of panic, bad news will add fuel to the fire. Mercer believes current valuations are attractive but the short-term outlook is very cloudy. New lows may be reached. However, there are opportunities for long-term investors, provided they consider the associated risks very carefully.
On the balance, the outlook for the New Zealand sharemarket is to be flat or slightly down over the next month. Stock selection will be important and individuals will have to work hard to pick winners. There will be a huge variation between the performances of individual companies. Investors will have to look closely at a company’s balance sheet, its funding arrangements, its competitive position and ability to perform relatively well during the recession. This will be a big challenge for individual investors as they may not have the necessary skills to assess these issues. Bear or sideways, moving markets are much more difficult for individual investors. They are reluctant to make sell decisions and often remain loyal to high-profile companies even when their performance is clearly deteriorating. In a severe downturn individual investors finally capitulate and either leave the sharemarket or give their money to an investment manager. The outlook for the NZX is relatively better than for other sharemarkets because we don’t have any listed banks. Even though the NZ economy hasn’t performed as well as Australia’s, our sharemarket has held up because a number of our larger companies, particularly Telecom, Contact Energy and Sky Network TV, are relatively immune from an economic downturn.
Source: Reuters
Janine Starks
International equities are still highly volatile but this year it’s time to be brave and buy, not bail. In five to 10 years’ time, I believe the biggest winners will be those who invested during 2009 and 2010. It’s likely that we’ll see a few false dawns (pre-Christmas was an example); otherwise known as “dead-cat-bounces”. I don’t believe there will be clarity until the banking sector and credit conditions are stabilised. Despite government injections into banks, we have not seen how it really works. Nor can we be sure it’s enough, so volatility will prevail. Right now, the doomsday theorists are out in force. Our poor British cousins has a disastrous start to the New Year when jobless numbers rolled in at 2.9 million, the pound reached 23-year lows against the dollar, gdp fell 1.5 per cent, Gordon Brown announced another bailout package for banks and the Daily Telegraph reported that every seven minutes a house was being repossessed. The debate now rages as to whether Britain is in recession or slipping into a depression (loosely measured by some as three years of recession). In the US, the big fear is the economy could fall into a deflationary
spiral, which will exaggerate their debt mountain and prolong the recession.
None of this gloom was unexpected. Economists were like broken records
predicting 2009 as the year the trouble would move from Wall Street to
Main Street (or Queen Street in our case). The macro-economic data from
around the world will continue to shock us in the months ahead.
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