Gloomy Monday looms after US crash

By ROD ORAM,Business Herald editor

New Zealand share prices are expected to fall sharply this morning as stock markets around the world begin a second week under heavy selling pressure.

Following on from Wall St's big losses on Friday, the NZSE-40 capital index might drop as much as 70 or 80 points, representing a fall of about 3.5 per cent, some analysts estimate.

"It's not going to be a very happy Monday," said Arthur Lim, senior investment analyst at Ord Minnett.

The global share rout was triggered last week by a collapse in prices of high-technology stocks in the US. After years of rises - peaking with a 35 per cent gain in the past six months - investors started to believe that such high values were no longer realistic.

US market sentiment also took a nasty knock on Friday from a much- higher-than-expected figure for inflation in March, prompting fears that interest rates there would rise faster than forecast.

New Zealand interest rates are heading higher too. The Reserve Bank is expected to announce on Wednesday a rise in its official cash rate from 5.75 per cent to 6 per cent. While higher interest rates would place an extra burden on borrowers, it would be good for savers.

The news looked all bad on Wall St on Friday. High-tech stocks, measured by the Nasdaq Composite index, fell 9.67 per cent, taking their loss on the week to 25.3 per cent.

Outside the feverish market for technology stocks, shares in well-established companies with strong profits fared better.

The Dow Jones Industrial Average fell 5.7 per cent on Friday and 7.3 per cent in the week.

Yet despite the setback, there had been few signs that US investor confidence was cracking. Share trading was heavy on Friday, but many investors were taking the opportunity to buy shares at the lower prices.

Further turmoil is expected in coming days, but analysts were virtually unanimous in declaring that a repeat of the 1987 global sharemarkets crash was highly unlikely. It would take an exodus of investors to trigger a similar collapse. But even so, companies were in far better financial shape now and could weather the storm.

In the days ahead, the New Zealand market is expected to suffer less than US markets. Local share prices have risen far less than those overseas in the past decade, and a much smaller proportion of shares are in high-tech companies.

"If anybody panics and starts selling at these prices, they will be doing themselves a disservice," said Mr Lim.

Investors were still in good heart, said Simon Botherway, investment manager at Arcus Investment Management, formerly Spicers.

"They understand that, in order to achieve better than bank returns over the long term, they have to accept equity market risk and volatility."