Much of the panic selling by US sharemarket investors, initially sparked by the fears of a banking system collapse, is now being driven by negative news coming from US company reports and also the realisation the world is heading into recession.
Subsequent to widespread sharemarket turmoil during the past three weeks, wiping trillions of dollars off bourse values, the New Zealand sharemarket's SE50 index is down 35% in value.
Research by brokerage ABN Amro Craigs said that of the 23% of the US companies which had reported on the New York-based S&P500 index, 47% had delivered better than expected results.
But the 26% earnings decline in largely consumer staples and the financial sector was disappointing, following a long period of broker downgrades.
ABN broker Peter McIntyre said it was apparent that although operating earnings of many US companies were up on the previous year, increasing operational costs and wage increases were taking their toll, which was then reflected in a poor bottom-line after-tax profit.
"Those costs in the middle are stripping out any gains made in [operating] earnings," he said.
Those sorts of results were expected to be mirrored in the third-quarter to September results of New Zealand companies, which began their reporting season in about three weeks, Mr McIntyre said.
With the SE50 down about 35%, Mr McIntyre believed the present sharemarket turmoil would strip a further 5%-10% of value from the index before "the markets hit the bottom", then began a "very slow" recovery process.
"While the recession is likely to be deeper than first expected, the recovery in our market will be driven by lower interest rates set by the Reserve Bank. I'd expect an increase in market value as interest rates are moved to a neutral position of around 5%, making term deposits less attractive and the yields on the New Zealand Stock Exchange more appealing," he said.
The stock of utilities companies, in both New Zealand and the US, in sectors such as energy, electricity generation and sales, and ports, will be in a better position to weather the reporting storm and exporters will be gaining some relief from the falling strength of the New Zealand dollar.
However, retail stocks in New Zealand were expected to show a continued decline, with a bleak outlook and the country heading further into recession, compounded by rising inflation above 5%, he said.
"Retail is heading towards a really difficult time and will be at the forefront of the reporting season," Mr McIntyre said.
He believes there will be a prevalence in companies reflecting tough times ahead, with earlier forecast capital expenditure (cap-ex) programmes either downsized, postponed or possibly cancelled altogether.
"While the Government will push for continued infrastructure [generally roading] spend, to keep some of the recession at bay, local bodies may delay cap-ex in order to protect their working capital," he said.
In reporting, a key indicator for the year ahead will be whether the New Zealand companies "bite the bullet" and maintain dividends at similar levels of the past two years, or decide to keep more cash in the business.
"Their share prices will be relatively untouched if dividends are maintained, but if they're slashed the investors will sell down and you can expect a hit on the share values," Mr McIntyre said.
He said US investors were selling out of hedge funds quickly as they were in negative growth and some had collapsed.
Subsequently, the funds were selling gold bullion, which had driven the price down in recent days by about 5%.
