Investment Research Group
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Recently I had a meeting with Bill Buechler, who runs an investment management company in the USA. He is amazingly bullish about New Zealand's prospects over the next decade or two and believes our economy is heading for a boom. We are set to enjoy big cash infusions from the ongoing commodities boom, the image of New Zealand as a safe and attractive place to own property and, most significantly, from an oil bonanza he believes could be as significant as the North Sea oil boom was to the UK.
New Zealand has large, barely explored territories with promising geology for oil deposits. He is convinced there is a lot of oil out there and, with the black gold at over US$100 per barrel, the incentive exists now to really look hard for it.
His optimism contrasts markedly with the current state of New Zealanders, who are worried about falling share prices, a softening real estate market, rising interest rates, collapsing finance companies and so on.
One approach for addressing market weakness is to hold more cash while selling smaller, illiquid or lesser quality shares to raise more cash. When the time appears right, you will use that cash to buy good quality shares at what appear to be attractive prices.
However, I am concerned about the latest news that Bear Stearns, the USA's fifth largest bank (and one that survived the depression of the 1930s) has essentially failed, has been bailed out by the Federal Reserve and about to be taken over. This suggests that a failure of the entire financial/banking system is possible and, if it were to happen, would likely have further harmful knock-on effects in the areas of property and possible general economic growth.
When in doubt, I like to look hard at the intrinsic businesses we are invested in. After 9/11 I asked "How does the destruction of two office buldings in New York affect the earnings of companies in NZ and Australia?" The answer was "Not a lot" so we started buying at what turned out to be bargain prices.
Today we are asking "How does the failure of financial services companies in the USA and locally affect the earnings of companies in NZ and Australia?" The answer is "It will affect those that borrow a lot, have significant exposure to property or are sensitive to consumer spending."
Portfolios that have significant exposure to these pressure areas should look at reducing this exposure, while retaining - and one day buying - those companies that are keeping their heads down and making money for shareholders during these tumultuous times.
The flipside to turmoil is opportunity, but you need to identify where the real risk is, and where the opportunities lie.
