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Horror Week On Sharemarket May Flush Out Bargain Hunters

Fuseworks Media
Fuseworks Media

By Simon Louisson of NZPA

Wellington, June 20 NZPA - It seemed like a worse week than it actually was.

Each day this week the NZSX-50 gross index fell and it sank to its lowest level in 28 months. However, the percentage fall for the week was only just over 3 percent.

A number of stocks hit multi-year lows with Fletcher Building notable. The No 3 stock, which has given investors a magnificent run from late 2001, leaping 6-1/2 times in value, but it has now halved from a May peak.

The NXSX-50's fall since a peak in October is 23 percent which is little different from the fall of the benchmark Australian index, the S&P/ASX200.

By comparison, despite the apparent implosion of the US economy, the Dow Jones industrial average index of 100 blue chips is only down 14 percent from its October peak.

Both Australasian benchmark indices are gross indices that incorporate dividends into calculations and therefore understate the extent of the market's slump. The NZ all stocks capital index, which takes out dividends from the calculation, has sunk 28 percent from its peak in May last year.

UBS managing director Campbell Stuart said there has been a crisis of confidence crisis among local investors.

Volumes had simply dried up. Mum and Dad investors were either sitting tight -- which many brokers see as generally a sound strategy -- or selling. Few are buying.

Markets all over the world have been hit by the US subprime mortgage crisis and the related credit crunch, rocketing oil prices, slumping house prices and diminishing household incomes.

Locally, the market has been affected by high interest rates, an overvalued currency, drought, falling economic growth and a crisis in the finance company sector.

Around the world, high inflation is expected to linger for some time and that is coinciding with households experiencing asset price deflation -- an unpalatable cocktail for central bankers to deal with.

Relief could come from a retreat in oil prices -- and that's anyone's guess -- and or a cut in local interest rates. The Reserve Bank has signalled that will begin in September but it is unlikely to be radical given intense inflation pressures.

The US Federal Reserve on the other hand, having cut official rates by three percentage points to 2.25 percent since mid-September to shield the economy from slumping, is now looking to hike rates to contain inflation.

Mr Stuart said the growth outlook for New Zealand was grim for the next two or three years and so from an international perspective there were likely to be plenty of markets that would do better.

A number of companies have announced profit downgrades and that trend is likely to accelerate as slackening demand from stressed households impinges further of growth.

Shares in TrustPower on Tuesday fell 5 percent after it issued a warning saying the drought had affected generation capacity and would hit profits.

On Friday, Tourism Holdings said lower tourist numbers, both internationally and domestically, would hurt profits. Other profit downgrades could be expected, brokers said.

Unlike many firms, Fletcher has barely downgraded its profit guidance. A big backlog of infrastructure projects will help insulate it from the housing market downturn, although its purchase of Formica in the US will result in short-term pain.

Merger and acquisition (M&A) activity has largely dried up, as the credit tap had been turned off to private equity firms. And many, such as those that bought Yellow Pages, PowerCo and TV3 owner MediaWorks, are nursing major headaches.

Action is still imminent with No 2 stock Contact Energy, whose 51 percent owner Origin Energy of Australia is the target of the attention of BG Group. The British owner has signalled it doesn't want Contact so a sale could trigger a full takeover.

Another top stock, The Warehouse, is still in play. A decision by the Court of Appeal is imminent over whether Australian supermarket chain Woolworths, or its New Zealand rival Foodstuffs, can launch takeover bids for general retailer.

Helping counter all the negatives, the gross yield across the market is now an attractive 9 percent and some stocks are into double digits.

Mr Stuart believes that would help M&A activity re-emerge.

"There's no doubt some of these companies are trading at very cheap valuations relative to what we've seen in the past and where potentially they will be in the future."

Those who are prepared to take a medium-term view could find bargains. However, this is a time when balance sheets will be tested and investors should opt for quality, he said.

One manager of a boutique fund, who declined to be identified, said he could see no relief on the local scene for earnings with people having little left in their wallets after paying for basics.

But he described Fletcher Building as "massively oversold" and many other stocks looked "genuinely cheap on a two- or three-year view".

Absolute return fund managers such as his -- those who pick winners rather than track an index -- should be loading up on the New Zealand market.

The difficulty is that funds are judged on quarterly performance and that made many wary of wading into the market. Large funds such as the Cullen Fund (NZ Superannuation Fund), that could take a long-term view, are in a position to mop up cheap stocks.

"This is the downside of the environment we are in at the moment, where everyone is concerned with quarterly performance and the problem with quarterly performance is that it is more compatible with punting than investing."

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