Market review: Not out of the woods yet
Friday, September 6th 2002, 2:48AM
by Anthony Quirk
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This market summary is provided by Guardian Trust Funds Management. To see how the numbers stacked up for various markets around the world in the past month and over the year, visit our Monthly Market Reveiw here |
Just as there was extreme over selling in world sharemarkets in June and July, there was probably also over zealous buying over the past month.
While it is pleasing to see a lift in the major sharemarkets from their recent lows, we think the markets will struggle to maintain their recent rise. This is because strong economic and earnings data from the United States is still some way off and because the Japanese and European economies remain moribund.
After the disastrous past few months August was much kinder for overseas sharemarkets with a slight gain eked out by month end.
However, the good news is the extreme negativity in June and July has lessened with the US market (as measured by the S&P 500) 15% up from its recent low on July 23. In contrast, the Japanese sharemarket was down 6% over the same period, reflecting its real economic problems.
An economist I used to work with in the late 1980s often said (usually when referring to the New Zealand environment): "Economies don’t stay in recession forever".
Unfortunately Japan seems to be testing that proposition with the country having been in recession (some call it a depression) for at least a decade. One could also point to Argentina which, for a whole host of reasons, has never recovered from its economic glories of the 1930s.
The Japanese problems are well documented but data in August suggested that the problems remain with disappointing industrial production and retail sales numbers being released. As an example, Japanese retail sales fell over 5% in July, the 16th straight month of declines.
An ever-widening fiscal deficit and a falling sharemarket accentuate Japan’s problems. For example, Japan’s Nikkei Index is now below 1985 levels. Japan’s salvation may be the Yen weakness likely to follow over the coming years because of the country’s low future growth profile and worsening credit worthiness.
This will help its export sector, as long as the United States economy recovers. A better export sector was the key reason behind Japan’s GDP actually rising 0.5% in the June quarter, the first in five quarters.
Japan is also sensitive to the prospects of Euroland, which is its second largest export market. Unfortunately, this economy is also stagnant.
This is illustrated by the problems of Germany, which is the key economy in that region. It also reported disappointing economic data through August with June quarter GDP up only 0.3% quarter-to-quarter and flat compared to a year ago. Germany’s economy has now been sluggish for eight consecutive quarters. Having to spend government funds on flood relief, rather than previously planned tax cuts, will not help this situation.
The concern held within that country on its economic environment was confirmed by a bigger than expected fall in the German IFO business-climate index. Most economists now see little hope of an economic rebound in the second half of 2002 with the government’s GDP growth forecast of 0.75% for the full year unlikely to be achieved.
The German sharemarket has reflected these problems, being down over 28% for the past 12 months.
Throw in the possibility of a US/Iraq war (and a higher oil price) and the scene does not seem set for a strong run up in global sharemarkets from here, at least in the short term.
However, there are some positives such as the receptiveness of the US Federal Reserve to cut rates, the reasonable income profile for most Americans, the passing of the August 14 SEC deadline without further accounting "timebombs" being announced by US companies and respectable recent US manufacturing activity numbers.
This leads to our view that global sharemarkets may become less volatile and extreme and may range-trade for a period, while investors assess whether the next big move is up or down.
We are positive on a 2-3 year view with the US and Asia ex-Japan looking particularly good over that time frame. The latter includes countries such as Korea, which have made the hard restructuring decisions that Japan seems to have avoided. This has contributed to predicted annual growth for Korea by some economists of over 7% for the next few years and more than 4% for countries such as Thailand, Singapore and Malaysia – not bad in anyone’s language.
In a volatile environment New Zealand has been a "little ray of sunshine", both in an economic and sharemarket sense. For example, New Zealand has enjoyed relatively strong GDP growth, up 4% year on year for the March quarter. The June quarter should also show respectable growth with a GDP rise of about 1% expected. This has fed through to corporate earnings for New Zealand listed companies with a very sound set of results reported in the June period-end earnings season.
Unfortunately all good things must come to an end and economists (and business confidence numbers) are now suggesting New Zealand’s economy is peaking. We cannot defy the weak global economy forever and commodity prices are starting to tail off, with dairy prices, in particular, at low levels.
However, New Zealand specific influences such as good tourism flows (aided by the upcoming America’s Cup) and relatively high immigration levels should mitigate this.
Therefore reasonable GDP numbers are still likely over the next few years from New Zealand, albeit nothing like the Asian growth numbers mentioned above.
To see how the numbers stacked up for various markets around the world in the past month and over the year, visit our
Monthly Market Reveiw hereAnthony Quirk is the managing director of Guardian Trust Funds Management
Anthony Quirk is the managing director of Guardian Trust Funds Management.
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