A fund manager's view on the bombings
Alliance Capital NZ general manager James Thyne gives his views on what the bombings in the US mean for investors.
Thursday, September 13th 2001, 8:03AM
For most of us, the initial reaction was disbelief, coupled with anger and dismay. Having watched the news on CNN for most of the day, other impacts are slowly starting to make their presence felt as well.
While it’s right to feel anger and dismay at such wanton destruction and taking of lives, it’s also important to recognise that such cataclysmic events also have an impact on economies and markets, and to view the two reactions separately.
At the time of the attack, the US economy was recognised as being on the brink of recession – the Federal Reserve had already made sustained cuts to rates, but it appeared that further cuts were also on the cards. Signs were beginning to emerge that the worst was over, and that the US had indeed managed a "soft landing".
US government spending had also increased, and was poised to increase further – which would tend to bolster growth. European central banks had also started their rates easing cycles.
The US markets are closed, and likely to remain closed for several days to come. However, once the initial shock is over, what are the US and the markets’ response likely to be?
It seems a cold and hard thing to acknowledge, but the markets will nonetheless have a response to yesterday’s news. In a strange way it seems apt for the markets to take the news negatively, but history shows that such terrible human tragedies often lead to rises in share markets.
Rises in the sharemarkets resulted during and after World Wars I and II, the Korean and Vietnam Wars, and the Gulf War. Whilst this attack is not a war in the same sense, it is likely to have some of the same consequences on the markets.
So what is likely to happen ?
- interest rates may fall even further, and more quickly than would otherwise be expected
- consumer confidence and spending may fall in the short term, but in the medium term, it may rise again, fuelled by cuts in interest rates and a willingness on the part of business to try to "resume service as normal"
- US government spending is likely to increase significantly – especially in security, defence, and intelligence gathering – and even in the clean-up of the destroyed and weakened buildings in Manhattan’s centre, and possibly in bringing the perpetrators to justice.
History shows us that a horrific event such as a war can often bring people – and nations – together.
This terrorist act is also likely be such a catalyst for a more concerted effort to improve economic growth. In turn, this will also bring opportunities for investment.
It is noticeable that there is some objectivity and pragmatism in the way in which the markets have already reacted.
Airlines, airports and insurance companies all suffered an expected and significant immediate drop in value following the news.
Compare this to commodity prices, such as gold and oil, which both rose; and gold, oil and non-cyclical stocks which all fared relatively well.
It could be said that the markets have reacted rationally so far– but it could also be said that they have over-reacted in more general terms. It is this over-reaction that some investment managers may perceive as an opportunity.
So, in general terms we expect:
- some existing trends to continue – for example commodity and real asset (e.g. house) price improvements already in train to continue their upwards movement. We also expect short-term interest rates to continue to fall.
- some trends to reverse – for example bond yields to eventually peak and equities to trough
- that there will not be a systemic failure of the banking system. All settlement systems operated successfully today. The major banks in the Twin Towers appear to have implemented disaster recovery procedures successfully.
Alliance Capital will continue to monitor the markets – and to recognise and act on developments.
James Thyne is the the general manager of Alliance Capital New Zealand
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