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Booming ten years on

The 10th anniversary of the 1987 stock market crash coupled with a soaring United States share market is sending jitters through the investment community. Should you be worried?

Monday, October 20th 1997, 12:00AM

by Philip Macalister

It's understandable that New Zealand investors are jittery on the eve of the 10th anniversary of the 1987 sharemarket crash that saw billions of dollars wiped off the market. That's particularly true when the New York Stock Exchange is at record highs and United States Federal Reserve chairman Alan Greenspan is sounding cautious notes.
After all the cliche that when New York sneezes the world catches a cold is also a truism.
The question being asked is, is the bubble about to burst?
AMP Investments head of investment strategy Paul Dyer says no. He told a recent IPAC Securities roadshow that "there is little evidence of a major near-term burst."

The reasons behind his answer lie in an historical evaluation of past events, and the fact that global markets are in a very different climate to 10 years ago.
Dyer says world markets in aggregate are over-valued, however there tends to be a lot of differences across the regions. For instance prices in the United States are "somewhat strained", while Japan would appear to be reasonably cheap.
One of the premises to the valuation equation is factoring in the investment and economic climate.
Currently markets are being valued on the continuation of the sound fundamentals such as low inflation and low interest rates, however if any of these, or other important factors, change then so do the valuation models.
Dyer considers the United States market is "stretched", but his view is that reasonable earnings growth will continue for some time.
In that market the average price/earnings ratio is 22 compared to a historic average of 14 which worries some commentators.
The view expressed by Dyer is that while PEs are historically high they are justified by the economic fundamentals.
The global economic climate is characterised by low inflation and low interest rates, boom/bust cycles are vanishing, new technology is boosting earnings and risk premia is falling.
"Historically that is a good combination," he says. "Stock multiples should be higher (in this environment). It would be surprising if we found cheap stocks in a low inflation low interest rate world."
To put the crash of 1987 into perspective Dyer calls on an analysis of history.
He says that sustained bear markets generally follow periods of really bad news such as Dutch Tulip mania (in the 1600s), the US Railroads crash (in the mid-1800s), the South Seas Bubble and the Mississippi Bubble.
All these events took place when the world was experiencing significant changes and people had high expectations of what these changes would deliver, yet they were unclear how the new environment would turn out.
"Preliminary expectations were wildly optimistic," he says. "There was a major correction once reality struck."
His point is that the world experiences speculative bubbles when circumstances are changing.
So how then does one account of the 1987 crash?
Dyer says the crash needs to be put into perspective and in an historical context it was more like a correction.
"1987 was just a ripple. It was a pretty minor event around the world."
He says it was not really a bear market as it wasn't followed by a long period of nil or negative returns.
New Zealand though was different to the world in 10 years ago. It was the hardest hit and took longer than most other markets to recover.
Dyer relates that to the historical examples of bear markets following major events.
During the mid to late 1980s New Zealand's economy was going through major changes at the hands of the fourth Labour government, and there was a huge thirst for property listings.
"People had wild expectations of what the new economy was going to look like," he says. "But it was a classic case of when reality strikes."
And when reality struck it hit the market hard.
So should we be worried about a hot New York Stock Exchange now? Probably not unless it coincides with a major world event, then the markets could enter a bear phase.
"We don't see a protracted bear market because stocks are over-valued," Dyer says.
The time to get seriously worried is when there is complete complacency in the sharemarket, he says.
In his view the markets aren't at that stage.
"I don't go to sleep at night with a chill worrying that stock prices are going to collapse," he says.
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