Market rally has a long way to go

Spicers media release

28 April 2009

Market rally has a long way to go
  

A stream of “less bad” economic data over recent weeks has kicked off a share market resurgence. However, while being a good reason for optimism, investors are waiting to see if the bounce from the bottom is sustainable.

Spicers Portfolio Management National Investment Manager Murray Harris says many of the world’s share markets are 20% higher from the lows experienced in the first week of March 2009.  The US Dow has rallied by 25.1%, the ASX All Ords is up 17.9% and the NZX 50 has increased 7.7%.

“Investors in the local market should not feel too neglected by the weaker rally in New Zealand shares as unlike the American and Australian markets, our market did not dip by more than 50% from its 2007 peak”.

“Despite the US Dow, ASX All Ords and NZX 50 still needing to rally by 75.4%, 86.8% and 62.9% respectively to return to the highs of October 2007, the gains seen from late March are encouraging.”

“The reason why markets still have so far to rally is due to the difference in relative base from the top to the bottom.  For example, if we take a share price that drops by one-third (33%) from $6 to $4, a 50% rally is needed to get back to $6,” says Mr Harris.

He says “Some of the emerging markets have been real standouts. Russia is up 42%, India 34%, Puerto Rico 53%, and Romania and Peru are both up 49% from their recent lows.”

Mr Harris says using history as a guide, when recoveries come they do so quickly with most of the gains from the rebound happening in the first six to twelve months.

“A recent example was the world recession from September 2001 to March 2003. During this time share markets dropped over 19%. Twelve months after that low point, markets surged by a remarkable 38% - and this pattern is evident in all five bear market periods since 1980.

He says bargain hunting is now underway in the current market and is well evidenced over the last month.

“Some of the US banking stocks have risen 100% from their lows, while some of the larger manufacturing companies are up by more than 30%.”

“This illustrates the benefit of buying low rather than selling low. Often, the very best periods of stock market performance follow periods of negative sentiment and high volatility,” says Mr Harris.

“The best five-year return in the US share market began in May 1932 – in the midst of the Great Depression – when US shares returned 367%.”

He says the lesson is, over the long haul, shares have consistently delivered superior returns, throughout expansion, recession, inflation, deflation, and war.

Spicers is a leading financial planning firm which has operated for more than 20 years and  provides advice on more than $1.2billion on behalf of thousands of New Zealanders. Visit Spicers at: www.spicers.co.nz.

ENDS

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