From Crashes (87) to Crises (07)

This week marks the twentieth anniversary of the 1987 share market crash.  This was effectively just a blip in many markets, but it was a major crash here in New Zealand.  Our share market had gone very high, and it had run for a reasonably long time.  For many of the companies, there was very little substance.  They were often interrelated.  And there was a lot of greed by investors and share brokers alike.  The market fell fast, when fear replaced that greed.  

The September quarter ended a few weeks ago and although maybe no where near as dramatic as 1987, it will be remembered.  To start with, we saw the introduction of KiwiSaver.  Over the years the New Zealand economy will benefit from this injection of capital.   After all these months, we are still surprised to find there are people who haven't given serious thought to KiwiSaver.   To benefit you only need to save $1,000 a year and in return you get an equal contribution from the government.  What could be easier?  Doubling your money this way has very little downside risk compared to the share market in the 1980's.
 
We have also seen the introduction of tax changes to managed funds which is a collective way to invest in different financial markets.   These new entities are called PIEs.  They now eliminate unfair capital gains tax and tax income at your tax rate.   Then there is the 'fair dividend rate' (FDR) on international investments.   FDR was introduced to produce a level playing field for tax on expected or deemed income up to 5%.   Overall these measures remove most tax anomalies, no doubt others will evolve.
 
Investment and asset price volatility during the September quarter was notable.  It was a wild ride.   What started as a hiccup in the US sub-prime (very risky) mortgage market turned into a significant global shortage of money to lend (credit squeeze) which threatened the orderly function of financial markets.  
 
Banks overseas were reluctant to lend to each other because of uncertainty as to the underlying quality and value of assets other banks were pledging in return for the loan.  As a result investors demanded a higher return or interest rate on the same investments than they did a month or two before.  The price of risk increased and we have seen that in the price of bonds in our market.  Central banks around the world came to the rescue with money for the markets but it is doubtful that we have seen the end to this crisis.  It will be interesting to see the latest round of bank financial results for the September quarter.  No doubt there will be some major asset write downs.  This could spook the markets, so it may be a rocky road for a few months to come.
 
Not to be outdone New Zealand has its own little crisis.  The failure and run on finance companies.   In some cases it was poor management of the company, and in others a lack of renewals or new investment money coming in to fund operations.   A side issue of this crisis, which is rightfully being questioned, is the integrity of commission driven investment advisers when it comes to acting in the best interest of their clients.   There is no substitute for good investment advice.  Poor advice or no advice may prove very expensive.  

So the past few months will be remembered as a time of crisis, a time of change, and a catalyst for change.