For New Zealand it may be Positive News

The worldwide market turmoil over the past couple of weeks may ironically be positive for many New Zealanders. Financial markets in Europe and the United States were incredibly fragile in the days leading up to the not unexpected news that ratings agency Standard and Poor’s were downgrading the United States from AAA to AA+. This is the same credit rating that New Zealand was downgraded to several years ago.

Standard and Poor’s made their announcement after the New York Stock Exchange closed on the Friday USA time. This was after all the major markets had closed for the weekend. They had given the USA plenty of warning, which the politicians chose to ignore. Instead the politicians chose to agree on debt measures some two trillion dollars different to what Standard and Poor’s said was required to maintain their credit rating. The differences in the chance of a credit default between AAA and AA+ are miniscule, in the range of one ten thousandths of a percent. So the difference is more symbolic and more of a damaged pride thing, which to the Americans is a king hit on their egos.

The three large ratings agencies, Standard and Poor’s, Moody’s, and Fitch comprise the US Congress sanctioned oligopolyof the Nationally Recognised Statistical Ratings Organisations. The consequences of their actions or lack of action are immense. They were largely responsible for the 2008 Global Financial Crisis with the ratings that they provided on what could only be described as toxic investments such as the billions of dollars worth of suspect mortgages and other financial products.

This time round, Standard and Poor’s may have got it right when it insisted that the USA do something about its level of debt. However, there is a massive problem for the rest of the world. That is because the US Dollar is the World’s Reserve Currency. There simply is no other viable alternative with the Euro having major difficulties. But the credit downgrade has had global consequences with trillions of dollars being wiped off global share markets.

However there is good news. Despite the credit downgrade there has been a massive flight of capital to the US dollar. This has effectively strengthened the US dollar, and the New Zealand dollar has weakened against the US dollar by several cents. This is great for our commodity based exports, as returns in New Zealand dollar terms should increase.

The USA Federal Reserve has also announced that it will keep interest rates low for at least the next two years. This should reduce any pressure for mortgage rate increases in New Zealand. This is great for borrowers, but probably bad news for those who try to enhance their lifestyle through bank deposits. They already face negative real returns while we have inflation rates higher than interest rates.

Everyone loves a sale, except it seems, when shares come on sale. Perhaps the problem is how long the sale is going to last, and will there be further price reductions. At times like this there can be some real investment bargains. The key is to take advantage if you can, however your first move should be to seek professional advice before doing so.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.