2022 – Capital Markets: Surviving the bears

Negative sentiment pervades global markets – from shares and bonds through to the “crypto crash” which has seen Bitcoin tumble through the floor, wobbly housing markets – even gold and silver are showing signs of tarnish.

Investors have been here before.

But this storm has a novel twist.

Central banks are now raising interest rates to stamp out inflationary pressures, treasurers are grappling with the need to bring back into balance those government budgets that were previously pumped up by extensive borrowing to sustain citizens’ wellbeing during Covid, savers – including New Zealand’s KiwiSavers – are taking haircuts on the face value of their portfolios – all this against a background of the war in Ukraine.

The upshot is that a lengthy bull run, punctuated by a couple of relatively short downturns, has now turned bearish.

The Herald‘s Liam Dann asks a pertinent question in his cover story, “Surviving a bear (market) attack”: “When confronted with a bear should we play dead or run?”

The upshot says Dann is, you can’t outrun a bear.

The risk of recession is rising and companies may experience earnings downgrades.

All of this puts the men holding the financial reins at the Beehive and the Reserve Bank – on opposite sides of Wellington’s Bowen St – in an invidious position.

Independent economist Cameron Bagrie asks “Who would be Minister of Finance over the coming years?” More and more economic vulnerabilities are being exposed: The sleeves need to be rolled up and the real mahi begun, he says in a clear steer to Grant Robertson.

Markets expert Sean Keane says Reserve Bank Governor Adrian Orr’s “inner raptor” has now been discovered and its talons are now clearly visible: “While no central banker will say so openly, it remains the case that a rise in unemployment and downward pressure on house prices are necessary pre-conditions for a reduction in demand and inflation pressures.”

There are stark warning signs for the housing market.

Bloomberg has singled out New Zealand in an article on the “world’s bubbliest housing markets”, ranking it at top place in its risk assessment of OECD countries.

Tim McCready points to other trends affecting the health of the capital markets, like the global talent shortage and the ongoing disruption of digital technologies.

Link Market Services reports how new technologies are working for the betterment of NZ’s capital markets – injecting efficiency and enabling companies to hold meetings digitally during the Covid disruption.

Suse Reynolds says market declines are great times to build companies – a sentiment shared by four VC specialists quoted in the report.

Forsyth Barr’s Matt Henry urges investors to stay calm in the face of share price volatility, and NZ Super Fund’s Stephen Gilmore cautions Kiwis to keep their eyes on the prize – not on their investment balances.

The NZX’s Mark Peterson also suggests now is the time to implement a key recommendation in the Growing New Zealand’s Capital Markets 2029 report – to use capital markets to fund infrastructure. “What better way than to pay KiwiSavers a return for the use of their capital than by building New Zealand infrastructure that their children and grandchildren will benefit from?”

The Financial Markets Authority is also keeping an eye out. Paul Gregory warns that the FMA is unapologetic about action on poor or weak practices, poor value or NZ investors being confused or misled.

But in times of relative crisis there is also opportunity. Corporate lawyer Silvana Schenone says there is still activity on the horizon with cash around to keep the market active and large global investors settling their eyes on New Zealand as an alternative investment option.

A roundup of local private equity players by the Herald’s Jamie Gray suggests bear markets and economic downturns will not stop private equity activity in New Zealand.

The answer, as always, is to take the downturn in your stride.

Corporate lawyer turned professional director Cathy Quinn says the reality is that many companies have seen their share prices fall below what directors think represents fair value.

“I believe it’s about keeping the faith – performing well, staying focused and better telling our strategy and stories to the market so our real value is ultimately better reflected in our share price.”

Quinn is confident that if good businesses need capital then our markets will respond accordingly – “there is no shortage of capital around”.

Enjoy the report.

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