CIP INVESTMENT MARKET COMMENTARY
Prepared by Peter Collerton, Capital Investment Planning Ltd
September was a negative month for all major equity markets. The US S&P 500 was -9.20% for the month and is now down -23.7% for 1 year. The UK FTSE100, French CAC and Australian All Ords all had negative months of -13.0%, -11.0%% and -11.2% respectively. The Hong Kong Hang Seng index was the big mover posting a negative -15.3% for the month. The NZSE 50 posted a -7.8% loss and is now down -27.6% over a year.
Bond yields continued their downward trend (and their capital values rose) as expected interest rate cuts were factored in.
The NZD rose against the AUD but fell against the other major currencies as the USD strengthened.
The current financial crisis consists of three related issues all of which are currently having a negative effect. Add a global recession and the outlook becomes even worse.
The threat of a global recession is well recognized by the markets at present. As the chart below shows, the latest IMF GDP figures estimate recession for advanced, emerging economies and the World through the remainder of 2008 and into March 2009. The IMF forecasts show rising GDP growth in 2009 and 2010.
The IMF report also warns that the forecast has substantial downside risks. “The principal risk revolves around two related financial concerns: that financial stress could remain very high and that credit constraints from deleveraging could be deeper and more protracted than envisaged in the baseline. In addition, the U.S. housing market deterioration could be deeper and more prolonged than forecast, while European housing markets could weaken more broadly.”
The global financial turmoil is so broad and deep that it's almost too big to grasp. Most financial crises involve one vicious cycle – a process in which something getting bad causes things to get worse.
The current financial crisis consists of at least three vicious cycles. It is not apparent whether any have bottomed out or are still gathering momentum for further downward moves.
Issue 1 - Confidence
All banks and insurance companies rely on the widespread perception they're in good shape for the long term. Even the soundest firm couldn't repay all its obligations on short notice, but, as long as everyone believes the firm is solid, it never has to. Yet tiny cracks in the foundation of confidence can bring a whole institution down. That's the classic bank run in which a mere rumour can start the vicious cycle of withdrawals and falling confidence that results in bank failure.
In the US, Federal deposit insurance ended runs on commercial banks but not on other financial institutions. Bear Stearns was hit with this problem and the Federal Government had to step in and give the market temporary confidence. It was different for Lehman Brothers who were apparently in deeper trouble. There was no rescue this time and Lehmans was allowed to fail, bought “for a song” by Barclays. As a result Bank to Bank confidence faltered badly. This created more rumours which brought more institutions to the edge. More bailouts were required and Bank to Bank lending ceased.
Now central banks around the globe have added billions of dollars to banks and guaranteed their deposits, underpinning the banking world and more importantly underpinning confidence. We will see if confidence has been restored over the coming weeks and months.
Issue 2 - Deleveraging
Lots of financial firms are concluding that they have too much debt (see chart next column). They're right. The paradox is that as they all try to do the right thing and pay down some debt, it makes them all worse off. To get the money to reduce debt, all are trying to sell financial assets. That glut of supply drives prices down, reducing the value of the assets the institutions still hold, so even after they've reduced debt, their debt ratios are no better than before. They have to sell more assets, driving prices down further, and so on.
This vicious cycle is different from the crisis of confidence in that it's based on real dollars, not psychology. Lehman's assets really did plunge in value, and everybody knew it. (That hard fact, of course, contributed to the confidence crisis.)
Issue 3 - Housing
The housing market is the root of the whole mess, so things won't get better until that market hits bottom.
U.S. house prices went up because of the massive stimulation provided by very low interest rates following September 11th and the Tech Wreck. Yale professor Robert Shiller, who predicted the current housing collapse, notes that after easy credit launched the housing boom, consumers faced strong incentives to buy the most expensive house possible with the biggest mortgage they could get. That behaviour then drove prices higher, strengthening the incentives, and so on. The bottom of the housing market is getting closer and it will be good news when some stability begins to appear.
What breaks these vicious cycles? In this case, massive and co-ordinated government intervention seems to be the only measure that has any hope of working. It has worked in the past but, until now, the measures needed have been on a size and scale dwarfed by the current ones. Will the intervention work and stabilize markets? The early evidence suggests it is having an impact on the financial markets with credit beginning to move again, albeit slowly. The equity markets have moved their focus to the global recession and its impacts. Over the coming months, we hope we will begin to see that stability continue and the beginnings of a recovery take shape.
as at 30 September 2008
|
1 Year |
3 Years |
5 Years |
|
Avg % p.a. |
Avg % p.a. |
Avg % p.a. |
| Inflation (Jun 08) |
5.1 |
3.2 |
2.9 |
| GDP real (Mar 08) |
1.1 |
1.9 |
3.1 |
| Housing (Mar 08) |
2.8 |
9.7 |
16.1 |
|
|
|
|
|
| 6 month Deposit |
8.1 |
7.6 |
7.1 |
| 90 -day Bank Bill |
8.6 |
8.2 |
7.5 |
|
|
1 year ago
|
3 years ago
|
5 years ago
|
| NZD/AUD (rate x years ago) 0.8224 |
0.8492 |
0.9144 |
0.8831 |
| NZD/GBP (rate x years ago) 0.3749 |
0.3554 |
0.3867 |
0.3627 |
| NZD/USD (rate x years ago) 0.6748 |
0.7171 |
0.6995 |
0.5838 |
|
|
|
|
| NZD/AUD (% chg) |
3.3 |
11.2 |
7.4 |
| NZD/GBP (% chg) |
-5.2 |
3.1 |
-3.3 |
| NZD/USD (% chg) |
6.3 |
3.7 |
-13.5 |
|
% return p.a.
|
% return p.a.
|
% return p.a.
|
| NZSX 50 Gross Index |
-27.6 |
-3.5 |
n/a |
| ASX All Ords Gross Index NZ$ |
-29.6 |
0.3 |
9.2 |
Hang Seng (Hong Kong) |
-33.6
|
5.6
|
12.1
|
|
Nikkei 225 (Japan) |
-32.9 |
-5.7 |
2.0 |
| SSE Comp (China) |
-58.7 |
32.8 |
13.6 |
| S&P 500 (USA) |
-23.7 |
-1.7 |
3.4 |
| FTSE 100 (UK) |
-24.2 |
-3.5 |
4.0 |
| GDAX (Germany) |
-25.8 |
5.2 |
15.8 |
| CAC40 (France) |
-29.5 |
-4.1 |
5.7 |
| MSCI World Index NZ$ |
-16.0 |
2.4 |
5.9 |
|
|
% change p.a.
|
% change p.a.
|
% change p.a.
|
| Gold |
16.1 |
27.0 |
23.5 |
| Oil |
30.2 |
23.3 |
60.2 |
Prepared by Peter Collerton, Capital Investment Planning Ltd, October 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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