News

By Royden Shotter

Market Commentary

While there are all too obvious challenges ahead, economic data is improving and increasing numbers of companies are returning to profit.  The optimists, of whom I am one, think we should begin to see a period of sustained recovery. 

There is always the possibility that something else will rise to further shake confidence but while the commentators continue to discuss the matrix of possibility and probability, the rest of the world continues on its way.  While people need somewhere to live, food to eat, clothes to wear and something to do, the economic wheels turn and we all somehow carry on. 

Yes, there is much de-leveraging to do, but this does not mean there will be no growth, or perhaps more importantly, no sustainability of profits, which is not always the same thing.  Right now there are billions of dollars sitting on the sidelines in cash and waiting to re-enter markets.  Many managed funds (and individual investors for that matter) are sitting on larger than normal amounts of cash and are simply waiting for enough indication of growth before they dive back in again.

Will this money re-enter the markets again?  The answer is ‘yes, eventually it must’.  New Zealanders often don’t realise there is a consequence to being such a small nation in a world-sense.  Part of this is the risk premium we have on our interest rates.  Over the last 30 years, money in the bank has been a very viable option for a decent chunk of a diversified portfolio.  While it is not so great an option right now it is far worse for those in developed nations overseas where interest rates are so low, after inflation and taxes you can be going backwards on a fairly regular basis.    

People in this situation can’t really afford to keep their money in bank bills for long periods and it makes stable companies paying dividends look pretty attractive, particularly once they stop going backwards.  This being the case, money can flood back into a market very quickly and once it starts you don’t want to be left behind.

This year has progressed very well and I believe there is much further to go.  In the absence of no more bad news and continued ground being made in economic circles, we could be in for a very positive 2011.