Investing in New Zealand? Read this first...

Dr Steve Sjuggerud - Tue 07 Mar, 2006

"...New Zealand businesses haven't been this gloomy in 35 years. You could even call them despondent. To make matters worse, New Zealands people are tapped out..."

New Zealand businesses haven’t been this gloomy in 35
years...
 
You could even call them despondent. The New Zealand
Institute of Economic Research’s latest Quarterly
Survey of Business Opinion shows 71% of New Zealand
businesses expect a downturn in the next 12 months.
It’s the worst number in 35 years. Other surveys showed
similar results, so it looks to be pretty close to true.

To make matters worse, New Zealand’s people are
‘tapped out’...

You can’t blame New Zealanders. Their sins are the same
as everyone everywhere else around the developed world.
In short, New Zealanders binged on property...

In 2003, the property market across the country was up
by 25%. More desirable areas have more than doubled in
just a few years time. New Zealanders caught
speculation fever in property. Folks here went on a
borrowing binge, taking equity out of their homes, and
heading to the shops to buy stuff.

The borrowing and spending binge has just been
ridiculous... In a recent paper, New Zealand’s central
bank said: “Households in New Zealand do not actually
save anything out of current income but instead dis-
save around 12 per cent of income per annum. New
Zealand households stand out as having the worst
savings record in the [developed world].

Generally, at a point of maximum pessimism like this,
it’s time to acquire assets. But after such a
borrowing-driven property market binge, a fall in house
prices of some sort seems almost inevitable. Real
estate is not a buy here, yet. We’ve got a few years to
go before it is...

In addition to New Zealanders being tapped out, another
risk to the property market is interest rates... New
Zealand’s central bank has been pushing up rates
incredibly high... It’s to the point now where the
interest rate on an adjustable mortgage in New Zealand
now averages 9.5%.

New Zealand’s central bank has got its work cut out for
it... Between the commodity price boom, the housing
boom and the subsequent spending boom by New
Zealanders, the central bank has been hiking interest
rates to cool things off.

The central bank has raised interest rates to 7.25% -
the highest in the developed world (with the exception
of tiny Iceland). High interest rates in a safe country
usually end up attracting money from investors.

Analysts are incredibly bearish on New Zealand’s
currency... in the latest issue of New Zealand Investor
magazine, the Bank of New Zealand predicts the currency
will crash from current levels of about 66 cents versus
the US dollar down to 56 cents by June of 2007.

Everyone is hoping for and predicting a fall in the
currency. Before Christmas, Finance Minister Michael
Cullen and Reserve Bank governor Alan Bollard toured
the financial capitals of the world talking down the
New Zealand dollar, discouraging people from investing
here.

I’m not so sure it will fall like everyone wants. The
central bank was very specific about this in its latest
statement, saying “Certainly we see no prospect of
[cutting interest rates].”

With unanimous sentiment against the New Zealand
dollar, and high interest rates here, parking some
short-term money in New Zealand for the rest of this
year is a contrarian idea that could make money.

As for New Zealand stocks, well, I have more work do to
here on the fundamentals. But it’d be hard to convince
me to buy right now, as they just hit lows not seen
since March 2004 (as measured by the MSCI New Zealand
index).

Summing up:

1) The New Zealand consumer is tapped out, or close to
it. There’s no hurry to buy property here now.

2) Interest rates here are incredibly high for a
developed country, and everyone expects the currency to
crash... so earning high rates of interest safely in
New Zealand may be an opporunity.

3) Stocks here might be getting cheap, but the
downtrend in stocks here is downright scary now. While
there’s more work to do, I don’t want to fight that
downtrend.

Regards,

Dr. Steve Sjuggerud