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Market Review: A year to forget?

A year to forget but will 2003 be any better? Guardian Trust Funds Management managing director Anthony Quirk gives his views on the state of the markets.

Wednesday, January 8th 2003, 12:15PM

by Anthony Quirk

This market summary is provided by Guardian Trust Funds Management. To see how the numbers stacked up for various markets around the world in the past month and over the year, visit our Monthly Market Review here

It is the time of year to reflect briefly on the past and then look towards the future.

Last year will be remembered as another poor year for global equities. For example, in local currency terms the widely followed US sharemarket index, the Dow Jones Industrial Average, was down 17% for the year - its worst performance since 1977. This makes three years in a row of declines for the Dow with the last time this happened being between 1939 and 1941.

While the US market was weak, continental Europe was even worse with Germany down 44% and France down 34% for the past 12 months. For the year Japan was down 18% and this comes after a decade of falls, resulting in that market being at 20 year lows.

Add to this an appreciating New Zealand dollar, with the Kiwi up 26% against the US dollar, and it made for a miserable time for domestic investors holding overseas shares – particularly those who had no hedging in place.

As has been well publicised the New Zealand sharemarket out performed its peers, being up 1% for the past 12 months. This compares with the Australian sharemarket, which was down 20%.

In contrast global and domestic bonds produced strong positive returns, 11.8% and 8.7% respectively. Reinforcing the value of "safe haven" investments, gold was up strongly with a gain of 25% over the past year. The gold price closed above US$350 in early January, a six-year high. Oil also reflected some current global uncertainty, hitting a two-year high in the last week of December and is almost 50% up from levels two years ago.

But that, as they say, is all in the past – what does the future hold? With the caveat that the crystal ball gazing I am about to embark on is prone to significant forecast error, here are my thoughts.

Another negative year for the US market in 2003 would be a reminder of the Great Crash of 1929 as this was the last time the Dow was down four years in a row. Of course, records are made to be broken but such an outcome would be surprising as the US economy is in far stronger shape than the Depression years of the 1930s.

However, the global environment does remain weak with the next two largest economies, Japan and Germany, remaining moribund. Add in the threat of war with Iraq, ongoing terrorism fears and tensions with North Korea and it is hard to see a bumper year ahead for global equities.

Therefore, for the next few years investors have the prospect of global equity returns that are not as bad as the past three years, but not as good as the boom of the 1990s. Positive, but lower, long-run equity returns does raise the issue of asset allocation, as many investment portfolios are set on the basis of higher expected equity returns.

The New Zealand sharemarket may well have had its "day in the sun" with most commentators expecting slower economic growth for this country over the next few years.

Recent Government moves may slow down immigration inflow levels while a stronger Kiwi dollar will start to negatively impact on export returns. This situation will be compounded if the global economy does not recover with New Zealand unable to continually defy this influence.

On the interest rate front much will depend on the global economic outlook. Many economists are predicting a pick-up for the US economy in the second half of 2003 but if this does not eventuate then the current low interest rate levels may well continue. However, it is difficult to see another year of double-digit returns for global bonds and a return around the coupon level is more likely.

In terms of domestic interest rates the incoming Reserve Bank Governor has (rightly) taken an even handed approach reflecting the positive domestic economic forces being offset by the negative global environment.

This negative global environment and US fiscal and current account imbalances mean that the kiwi dollar could stay at current or even higher levels for much of 2003. However, the likely return to a growth rate for this country below its peers means that the long-term prognosis for the kiwi dollar is for it to move down. Moreover, it seems the key to our growth at the moment is strong immigration, robust tourism numbers and good export returns – all of which are negatively impacted by a stronger kiwi.

With the poor global sharemarket returns of the past few years’ hedge funds are becoming of more interest to investors. Last year proved a tough year for such funds with most struggling to achieve a positive return over the 12-month period. However, the returns generated were well in excess of the large negative sharemarket returns and the case for hedge funds as an effective diversifier remains intact.

In summary, I expect 2003 to not be as traumatic for financial markets as has been the case of the past few years. On the other hand it is unlikely investors will be doing cartwheels celebrating a year of stellar returns. Most likely is a year of hard grind for investment professionals as they earn their money trying to generate a sufficient return, relative to investor expectations.

To see how the numbers stacked up for various markets around the world in the past month and over the year, visit our Monthly Market Reveiw here

Anthony Quirk is the managing director of Guardian Trust Funds Management

Anthony Quirk is the managing director of Guardian Trust Funds Management.

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