Stay cool for this too shall pass

THE world’s financial capital of Manhattan has been devastated, with the brightest and the bravest among the slain. It remains to be seen how deep a wound the terrorists have inflicted on the US economy and how long it will take to heal.

The initial 7 per cent share slide in the US was almost exactly as had been widely predicted. The fact the NYSE functioned at all triggered a relief rally on most markets, including our own. There are certain to be aftershocks, however.

I cannot remember a time when share traders have placed such an emphasis on humanity over money. The closest parallel would be after the Tianenmen Square killings in 1989, when Chinese stockbroker colleagues in Hong Kong were not prepared to even discuss share prices.

In corporate America, huge losses started as soon as the attacks began. NBC, CNN, FOX and the other TV networks have forgone hundreds of millions of dollars in advertising revenue. The airlines are looking at billion dollar shortfalls in the coming weeks, and insurance companies are beginning to calculate an exposure in excess of $50 billion.

A jump in unemployment and a dip in consumer confidence in August already had the $US11 trillion economy teetering on the brink of recession. Recent events are likely to push it over the edge, at least for the balance of this year. But American fortitude should not be underestimated. The Federal Reserve has pumped $80 billion of liquidity into the banking system. Interest rates have been cut to 3 per cent and they could go lower still. The US Government will dig deep into its gigantic surplus to fund more tax cuts and massive public spending. None of this would counteract a collapse in retail spending, which accounts for three quarters of GDP. Americans have been told it is their patriotic duty to shop ’til they drop.

Wall Street, where $US17 trillion worth of domestic and foreign stock is listed, was already on the skids before news of the terrorist atrocities. On September 10 the Dow Jones Index was 18 per cent down on its peak, the broader S&P 500 had fallen 28.5 per cent, and the hapless Nasdaq was down 66.4 per cent. The flight to quality has pushed US short-term interest rates down to the lowest levels since Eisenhower was in the White House. At some point the competing risk premium of equities will become attractive, and that will be true here too.

The Australian share index started this week at 3,040.8, just 11.2 per cent below its all-time high. That was considerably more robust than the 31.4 per cent retreat in the UK, the 42 per cent slide in Germany or the grisly 72 per cent decline in Japan. The reasons for the resilience were a combination of a competitive exporting currency and good economic fundamentals. The Economist magazine, in a recent poll of 12 global institutions, found they expected the Australian economy to expand at 4 per cent next year – well ahead of the other OECD nations. That rate of growth is now clearly under extreme threat. However, business is going into 2002 with corporation tax clipped to 30 per cent, no sign of wage push inflation, and borrowing costs at the lowest level in living memory, and likely to go lower.

The collapse of Ansett came at the worst possible time for our stock market and confidence was further shaken by the big slide in insurance blue chip QBE, which is facing massive claims from the US disaster. Investors should keep their cool. Remember, the $500 billion superannuation industry is automatically collecting more cash every month. Some of that must go into Australian stocks. The recent increased diversification overseas has hardly been an unqualified success.

The days of wine and roses and quick profits are over. It was never a good idea to buy shares with borrowed money – shame on those seductive advertisers. The argument that dividends were out and capital growth was in also was flawed. The vast majority of retail investors will still have the satisfaction of fully franked dividend cheques plopping into the letterbox. Those who are cashed up now have a lot of time to slowly pick up shares in sound companies offering a good yield.

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