Market tears blur vision of recovery

By KEVIN TAYLOR and DANIEL RIORDAN

New Zealand's largest funds manager says overseas sharemarkets have been hit by emotion, and underlying economic factors look good.

The cool heads at AMP Henderson this week presented their latest quarterly investment results with soothing words about long-term global sharemarket prospects.

Chief investment officer Chris Wozniak said the latest two-year bear market was not unusual and similar periods of two or more years had happened seven times in the past 100 years.

The funds manager's actively-managed global equities fell in the June quarter by 12.5 per cent, and for the June year they were down 24.6 per cent.

For the second consecutive quarter property and bonds showed strong returns, of 9.8 per cent and 7 per cent respectively.

Despite positive signs, for example high business confidence and two consecutive quarters of economic growth in most OECD countries, global sharemarkets had a poor quarter.

Wozniak said emotion was clouding analysis and pointed out the "increasing contradiction" between the global economy and markets.

The poor quarter for world sharemarkets was caused by global security worries, corporate governance concerns and the final effects of the Nasdaq bubble.

AMP Henderson thinks returns will rise rapidly, and over the next decade annual returns will be 7 per cent to 9 per cent in the United States, 10 per cent in Britain and 9 per cent to 10 per cent in Europe.

The only question was how long it would take.

Wozniak said global sharemarkets had "really swamped" the good performance of other asset classes like property.

The New Zealand sharemarket's performance had flattened, but it was still "getting by".

The rise in the New Zealand dollar had also hit local investors' returns.

Wozniak said when the markets did recover the new "normal" range of returns was expected to be in the 7 per cent to 10 per cent range, not the 11 per cent to 14 per cent of the 1990s.

AMP Henderson head of investment strategy, Paul Dyer, said investors should not worry after the biggest slump in markets since the oil crisis-induced tumble of 1974.

Dyer said recent weeks represented the last stages of an overdue correction to an out-of-control bull market.

Since markets peaked in early 2000, US shares have fallen an average 40 per cent and European markets by 30 per cent to 40 per cent.

He said the corrections over the past two years had happened in three stages. For most of that time average share prices had actually risen, but dotcom stocks had fallen so far that overall market indices had gone down.

Last year's September 11 terrorist attacks sparked "a classic panic and over-reaction" which carried through into March of this year.

The latest stage, starting in March, had surprised Dyer the most - a 20 per cent fall with no obvious explanations.

He said the accounting scandals were a side issue, and what was really behind the past few months' tumble was a restoration of the traditional risk margin between shares and other assets.

"A generation of investors who knew only rising sharemarkets forgot what equity risk was all about.

"Now they've discovered it in a hurry."

Two years ago, US shares were trading on average price/earnings multiples of 25 (on forward earnings) - implying annual earnings yields of 4 per cent while 10-year Government bonds were yielding 6.5 per cent.

That situation was typical of a bull market coming to an end - it could not last, and it had not.