Investment Research Group
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However, the fundamental problems with the world economy remains and this is just the start of the volatility. The solution the US Fed believes, and supported by their politicians in an election years, is to print more money, cut interest further, to stimulate the faltering US economy.
The refusal to have a small correction now and some insolvencies, virtually guarantees a much greater correction later with a lot more insolvencies. As the market report, The Privateer points out: "Adding more scaffolding does not repair the foundation."
The credit driven boom of recent years, pushed most share markets, including NZ, beyond their fair value.
This market cycle has followed a pattern often seen in the past. It starts with easy credit and a general increase in money supply, and it ends in tears when credit is tightened up.
The general view is that share markets are expensive but not in bubble territory like in 1987, for example.
However, property in this country, the US and elsewhere is deep into a bubble territory and that is disturbing.
Property doesn't crash as easily as shares because it is illiquid and sellers take properties off the market when they don't get their price. Volume dries up but prices hold up because sales aren't going through. Eventually sellers realise that prices are down for good and volume picks up but at much lower prices.
Share markets are quick and liquid and adjust to new price levels very quickly.
Among the doom and gloom, this market is a dream for certain investors building up their retirement portfolio. Those who still have a long working life ahead of them, who have a small portfolio which they are drip feeding with regular investment will be very well served by the current collapse. This is the time to bring in blue chip quality shares at relatively low average costs.
The big themes for 2008 are as follows:
Sluggish outlook for the local economy means there is not much hope of a very strong performance for NZ equities this year, but falling share prices present real opportunities for those prepared to select carefully.
With an expected return of almost 9%, cash is king for at least a year and other asset categories like property and shares will struggle to beat it. But timing your move in and out of cash is harder than it looks and some share exposure must be maintained.
High price:earnings (p:e) shares (above 18 say) are highly vulnerable as they tend to suffer a double whammy. They are likely to fail to deliver great results as the global economic retraction impacts on their ability to increase sales and margins.
Even a small undershoot of expected earnings can decimate the share price of a high p:e share as the p:e retracts sharply from their high levels when the market perceives abnormal growth is no longer within its grasp.
Investors should consider moving to moderate p:e, defensive stocks. And they should increase their cash allocation within their portfolio and reduce shares, and repay debt where they can.
