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14 Aug 2022 19:09
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  •   Home > News > Business > Features

    Bad Times Reveal Opportunities

    We have seen markets plummet amid fear and desperation, and then recover just as sharply. What constitutes "good news" in this seesaw of emotions is often some new form of intervention where Governments under write the risk in the economy.

    Investment Research Group
    Investment Research Group
    Does this mean the crisis is over and all will be well with the global economy, financial sector and markets? I'm not so sure. For starters, the trillions of dollars being thrown at distressed banks might stop them from falling over, but it does not mean they are about to return to their generous lending policies of the past.

    As a result, loan finance will remain expensive and hard to obtain. This will put businesses under pressure and also could limit any recovery in the residential property markets.

    The International Monetary Fund (IMF) is not known for its kneejerk or hysterical reactions so comments in its latest World Economic Outlook report make sober reading. Take this for example: "The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. Against an exceptionally uncertain background, global growth projections for 2009 have been marked down to 3%, the slowest pace since 2002, and the outlook is subject to considerable downside risks."

    It notes the major advanced economies are already in or close to recession, and, although a recovery is projected to take hold in 2009, the pickup is likely to be unusually gradual, held back by continued financial market deleveraging.

    My biggest concern is that the impact of liquidity and credit crises have yet to be felt on the housing sector. Affordability benchmarks in many countries, particularly NZ and Australia, appear too high and if money is harder to come by and mortgages harder to service, then it is inevitable that prices would fall.

    The IMF has taken a stab at figuring how overpriced property is and finds that house prices in Australia are 20% too high while they are only around 7% overvalued in this country. Ireland has the biggest bubble with house prices more than 30% too expensive.

    A particular surprise in recent months has been how severe and rapid the decline in commodity prices has been. It was not that long ago that most experts were saying that oil and mineral prices would continue to go up no matter what because of insatiable demand.

    Now it is apparent that markets were the latest in a long series of bubbles and speculators had driven prices up to silly levels. However there are also changes to supply and demand to take into account, plus movements in the US dollar in which most commodities are priced.

    I believe the commodity cycle still has several years of upturn left and now is not a bad time to be investing in large cap diversified companies, and Australia offers some choice in this. I still remain resolutely in favour of gold, not least because it increasingly is being seen as a good store of wealth when confidence falls in the technically worthless 'fiat' money that our central banks keep printing like confetti.

    I find it curious that the official world price of gold remains in the high US$800s while the man in the street has to pay more like $1200 - $1500 for a 1oz gold coin - and wait 10 weeks to receive it in the case of at least one major supplier in this country. This imbalance cannot last and unhedged gold producers will benefit if the world price starts to rise.

    © 2022 David McEwen, NZCity

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