During March the pace of decline in world markets slowed. The US S&P 500 fell by only -0.6%, European markets and New Zealand declined by around -3% whilst Asian markets were the target for profit taking. The Hang Seng was down -6.1%, the Nikkei 225 -7.9% and China’s SSE Composite down -20.1%. March also saw an easing of the rise in oil prices (to 4.4%) and gold (5.6%).
Whilst the declines in March may have eased somewhat, the first three months of 2008 was a very difficult start to the year. Share market falls for this period ranged from -34% in the SSE Composite (China) index to (surprisingly the best performing market) the US S&P 500 which was -9.9% for the quarter. Local shares have also tumbled. The NZSE 50 index fell by -14.1% and the Australian All Ords index by -15.7%. Many other major markets fell by a similar amount to NZ and Australia.
March saw the first failure of a major banking name with Bear Sterns being sold for next to nothing and its assets supported by emergency Federal Reserve actions. So what is happening in the financial markets that they have got to this stage of systemic collapse? In a word, the missing factor is “TRUST”. The major financial institutions of the world no longer trust their counterparts. The assets that are offered as security for liquidity needs are no longer accepted at face value. The “market” price is no longer believed.
Hence the need for the massive amounts of central banking liquidity and asset backing required currently to keep the financial markets operating.
The only solution is going to be time and it will need considerable time for the “system” to find trust again. Trust will come back into the system as markets stabilise and asset prices find correct levels as “bad debts” become quantifiable.
The Federal Reserve and Securities and Exchange Commission in the USA have already put a lot of measures in place. One that is important is the caveat added to the new financial accounting rules governing the pricing of assets. This requires all assets to be priced at their true market levels. It states “Fair value assumes the exchange of assets or liabilities in orderly transactions. Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability."
Therefore if the asset is subject to forced liquidation or distressed sale a modelled price can be used in place of the market price. The last time this happened was during the Latin American Debt crisis in the early 1980s. Effectively Latin America stopped repaying loans and therefore bankrupted most major US banks. At that time the Federal Reserve allowed the banks to keep the assets on their books at cost value.
This brought the banks the necessary time to recapitalise and write off the debts over the following years as capital increased. This is now looking very similar to the current actions being taken, giving the financial sector the breathing space needed for an orderly write down of problem assets.
The latest IMF report has put the losses from Subprime at just under USD1 Trillion (it doesn’t hurt if you say it fast). This is a revision upward from estimates of around USD 600 Billion previously in the market.
They have also downgraded global GDP growth to 3.7% in 2008 and 3.8% in 2009, which is a 0.5% downgrade. This would indicate very low growth or recession is definitely on the cards for some countries.
Last month, we talked about a possible “food crisis” and we’d like to continue this discussion. Wheat supplies remain under pressure with the current surplus at 147 Million tonnes. This sounds a lot but bear in mind that the world consumes around 2.8 million tonnes per day. The surplus equates to only 52 days’ excess and is the lowest since 1983. Of this surplus around 50% is held by China who recently increased export restrictions. The 2008 crop is currently forecast to be good but will not significantly add to surplus supplies.
Prices continue to climb for most food categories (see charts below). As can be seen, dairy prices have peaked but all other prices continue to rise and the overall food price index is rocketing.
Source: Food and Agriculture Organisation of the United Nations
Below are some statistics on the increased need for bio-fuels. This information doesn’t help in answering the question as to where we will get more food. It simply poses more questions.
The outlook for food production is widely expected to worsen as agro-industries prepare to switch to highly profitable bio-fuels. According to Grain, a Barcelona-based food resources group, the Indian government is committed to planting 14 million hectares of land with jatropha, an exotic bush used to make bio-diesel. Brazil intends to grow 120m hectares of bio-fuel plants and Africa as much as 400m hectares in the next few years. Much of the growth, the countries say, would be on unproductive land, but many millions of people are expected to be forced off the land.
This land use change is being driven by government policies as can be seen from the table below:
|
|
|
|
|
|
Australia |
350 million litres by 2010 |
|
|
|
EU
|
2% by 2005
5.75% by 2010
10% by 2020 |
|
|
|
Japan |
6 billion litres by 2020 |
|
|
|
USA
|
About 15 billion litres by 2006
28 billion litres by 2012 |
Source: OECD
If all this land is being used for bio-fuels, where are food crops going to be grown?
The need to produce and use bio-fuels is just one of weapons in the armory in the war against the effects of climate change. Slowly but surely, the financial implications of these issues are being investigated and reported. As you would expect, some will profit from these changes and others will not.
Alliance Bernstein has just published a report entitled “Abating Climate Change, What Will Be Done and the Consequences for Investors”. Their research conclusions are as follows:
- The nuclear industry will boom
- Coal plants will be transformed
- Solar power, wind power and bio-fuels will disappoint expectations
- Plug-in hybrids will revolutionise transport
- Advanced-battery and power-semiconductor markets will surge
- Carbon dioxide sequestration and storage will create new major industries
- The oil industry will be at risk in the long term
Interestingly, the latest Kiwisaver fund offering picks up on some of these themes. The ASB’s First Choice Kiwisaver fund now offers access to US-based Generation Asset Management Limited which was founded by Al Gore and David Blood (!).
as at 31 March 2008
|
1 Year |
3 Years |
5 Years |
|
Avg % p.a. |
Avg % p.a. |
Avg % p.a. |
| Inflation (Dec 07) |
3.20 |
2.91 |
2.57 |
| GDP real (Dec 07) |
2.50 |
2.96 |
3.08 |
| Housing (Sep 07) |
11.4 |
12.1 |
14.8 |
|
|
|
|
|
| 6 month Deposit |
8.20 |
7.63 |
7.07 |
| 90 -day Bank Bill |
8.83 |
8.23 |
7.59 |
|
|
1 year ago
|
3 years ago
|
5 years ago
|
| NZD/AUD (rate x years ago) 0.8733 |
0.8815 |
0.9295 |
0.9203 |
| NZD/GBP (rate x years ago) 0.4057 |
0.3585 |
0.3829 |
0.35 |
| NZD/USD (rate x years ago) 0.7968 |
0.6982 |
0.7306 |
0.5541 |
|
|
|
|
| NZD/AUD (% chg) |
1.7 |
7.2 |
6.2 |
| NZD/GBP (% chg) |
-10.5 |
-4.4 |
-12.7 |
| NZD/USD (% chg) |
-13.0 |
-9.0 |
-31.0 |
|
% return p.a.
|
% return p.a.
|
% return p.a.
|
| NZSX 50 Gross Index |
-14.1 |
-15.5 |
n/a |
| ASX All Ords Gross Index NZ$ |
-15.7 |
-9.5 |
10.6 |
Hang Seng (Hong Kong) |
-17.8
|
15.4
|
23.0
|
|
Nikkei 225 (Japan) |
-18.2 |
-27.5 |
2.4 |
| SSE Comp (China) |
-34.0 |
9.1 |
64.7 |
| S&P 500 (USA) |
-9.9 |
-6.9 |
4.0 |
| FTSE 100 (UK) |
-11.7 |
-9.6 |
5.5 |
| GDAX (Germany) |
-19.0 |
-5.5 |
16.8 |
| CAC40 (France) |
-16.2 |
-16.5 |
5.2 |
| MSCI World Index NZ$ |
-2.77 |
10.18 |
16.52 |
|
|
% change p.a.
|
% change p.a.
|
% change p.a.
|
| Gold |
27.4 |
56.0 |
45.2 |
| Oil |
10.7 |
60.7 |
34.6 |
Prepared by Peter Collerton, Capital Investment Planning Ltd, April 2008
Capital Investment Planning Ltd, P.O. Box 22238, Christchurch, New Zealand
Phone +64 3 379 1913 Fax +64 3 377 2330
Important Note. This publication may be copied in whole or part provided Capital Investment Planning Ltd is acknowledged as the source. Investment and mortgage rates are indicative only and, whilst correct at the time of publication, are subject to change without notice. Text may be opinion only and should not be seen as a substitute for personal professional advice relative to an individual's personal situation.
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