Expect the unexpected!
March was a more interesting month than anticipated after the hum drum start in January and February.
Monday, April 5th 2004, 9:41AM
by Anthony Quirk
After being involved in the markets for almost 20 years I should have learned to expect the unexpected! Perhaps the most surprising financial market event over the March month was the decision of the Reserve Bank of New Zealand (RBNZ) to give itself scope to intervene in the currency markets. However, I think there is more "smoke than fire" on this one, with the likelihood of any intervention being minimal.
The RBNZ knows it has little power to turn the tide in currency movements as evidenced by the futile and expensive intervention of the Japanese authorities with the Yen. While the Yen obviously trades in much greater volumes than the Kiwi it is worth noting that the Bank of Japan has sold over NZ$220billion of Yen this year alone; slightly more than is being allotted to the RBNZ! Even then the effect on the Yen has been negligible and the Bank of Japan appears to be giving up trying to (unsuccessfully) hold down its currency value.
The most disturbing aspect to me is not that the RBNZ is potentially able to bet on movements in the currency markets, but more that it appears to be becoming more politicised. One does wonder about the "under current" of influence in this case for the RBNZ to change its policy. The attitudes of various public bodies such as the RBNZ can, at the very least, be indirectly impacted by the policy position of the Government of the time. In this case Dr Cullen's pre-posturing on currency suggested he would be very receptive to the RBNZ's new stance and so it proved.
Looking at the New Zealand economy unfortunately one thing hasn't changed over the past 20 years. That is, the cycle of export growth fuelling strong domestic demand, which eventually turns into a balance of payments crisis (as the export sector wanes but imports stay strong). And this is the pattern we are seeing again through the latest recovery with the 2003 calendar year current account deficit announced during the month at around $6billion or 4.4% of GDP.
As a country we seem locked into the mode of "spending up" as soon as things pick up. While more productive countries can do this for longer New Zealand cannot afford to spend more than it earns for very long. The classic market adjustment for such a situation comes via a depreciation in the currency and/or an interest rate rise.
When it does arrive the adjustment can be dramatic and that is why the long-term direction of the kiwi dollar is probably down from current levels; it is the timing of this which is hard to pick. Part of the timing issue is that other western countries, particularly the United States and Australia, also face significant current account deficits and so their currencies are also potentially under pressure, with the former currency also to be negatively affected by the Bank of Japan's u-turn on the Yen.
Turning to the United States, the company profit reporting season for the first quarter of the 2004 year is about to get under way. Earnings growth expectations for the quarter and the 2004 year have been rising, which has helped to under pin the US equity market. For example, First Call's S&P 500 year on year 2004 first quarter earnings growth expectation is 17%. This is at a time when aggregate profit margins for the US corporate sector are at an all-time high.
In order for the market to "kick on" from here companies will need to significantly exceed expectations. With P/Es in the US now generally returning to historically high levels, a significant degree of positive expectations are factored in. In such an environment a company profit result which is "only" in line with expectations is likely to be viewed as disappointing, which makes the overall market more vulnerable.
On the bond side the "I" word, inflation, is now starting to be discussed more frequently by economists and market commentators. After being in hibernation for some time, the very loose and accommodative monetary policy in the United States and high commodity prices (driven in part by China's huge production expansion) means there is now more potential of material inflation occurring in the US economy. Any sustained rise in inflation expectations would, of course, lead the US Federal Reserve to raise rates. Any rate rises would, in turn, hinder any further rally in equities.
However, a rate rise in 2004 from the Federal Reserve is not a certainty with some market commentators still picking the next move from the Federal Reserve will be to lower rates, particularly if the jobless recovery in the US continues. However, they do seem to be a decreasing minority.
In summary, a fascinating month in the markets but one that does not change our underlying view that most markets will struggle to achieve strong returns for the entire 2004 year.
Anthony Quirk is the managing director of Guardian Trust Funds Management.
| « Golden rules for investing in LICs | Is this as good as it gets? » |
Special Offers
Commenting is closed
|
|
Printable version |
|
Email to a friend |
