The sky isn’t falling

09/08/2011

Standard and Poor’s decision to downgrade the USA from AAA to AA+ has led to falls on share markets around the world.

But the sky isn’t falling.

Headlines have concentrated on prices which have dropped, but have ignored yields which generally seem to be reasonably healthy.

Falling prices are only a  real problem if you have to sell or are heavily leveraged. For everyone else they’re only a paper problem. With many investments, time is a friend and the price of most shares which have gone down will come up again.

I was a trustee of an organisation that had nearly $200m invested. Our advisors regularly provided us with graphs comparing investments which showed that over the long term, good shares provided the best return.

The trick is to know which are the good ones.

The downgrading is a government problem rather than a business one but that and the consequent share market falls will make businesses and those who bank them more risk averse. That in turn will slow down economic growth.

The volatility is unwelcome but New Zealand is well-placed to weather it:

“The downgrade of the US shows we continue to live in unusually risky and uncertain global environments,” Mr Key said at his post-cabinet press conference.

“The Government has focused on debt and managing spending, this approach has been in all three of our budgets and recent events are further evidence we have moved in the right direction.”

Mr Key said he didn’t think Treasury’s economic growth projections were going to be proved wrong because there were several factors favouring New Zealand, like the Christchurch rebuild and the Rugby World Cup.

He said he was “more optimistic” about the future than those who feared a deepening international recession.

Companies were in a better position now than they had been in the past.

And it’s not just the PM who isn’t pessimistic:

Market commentator Arthur Lim said the international uncertainty in recent years, with a seemingly endless stream of economic woes, had caused “a lot of retail investors simply to call it quits”, yesterday.

“The only way to describe it is panic selling by retail investors,” Lim said.

But the sharp fall was on light volumes. “If the market was falling precipitously on big volume then we really have something to worry about.”

Lim said New Zealand was well placed to capitalise on the global economic uncertainty. The economy was in reasonable shape and much more aligned with the fortunes of the growth economies of Asia, and [there would be] the cushioning effect of the Christchurch rebuild.

Key trading partner China was among other Asian countries looking to diversify their currency and country exposures away from the US.

“And New Zealand is a seen as a very attractive country to put some of their money in,” Lim said.

New Zealand had forged a great symbiotic relationship with China, which was now our second biggest trading partner, supplying agricultural-based products and services in return for consumer goods from televisions to shoes.

We can be grateful to this, and the previous government, for pursuing new trading opporutnities.  Australia is our biggest trading partner and China comes next. Both are better placed to withstand cool eocnomic winds than our traditional partners in Britain and Europe.

Commodity prices are expected to fall but they have been very high, and that’s not all bad news. A fall in the price of oil has already knocked three cents off the price of fuel here.


Silver lining

17/09/2008

As eyes anxiously turn to financial markets I’m reminded of the silver lining to the cloud of the 80s’ ag-sag.

Few farmers were hit by the 1987 share crash because their equity had plummeted and most had neither the credit or cash to invest in the share market.


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