KEY POINTS:
The good news is that the bad news is all out there.
And that means financial markets have moved towards pricing in the effects of the global financial crisis, projected unemployment, falling commodity prices and all manner of fiscal ills, says Jason Wong, the recently appointed head of investment strategy for AMP Capital Investors.
At a media briefing in Wellington today, Wong said AMP Capital's own negative returns on its flagship Balanced Fund (which lost 10.5 per cent in 2008) were not unprecedented, coming after five strong years.
Global finance "came to a grinding halt" with the collapse of Lehman Brothers bank last year , he said.
He produced a raft of graphs and statistics painting a grim picture, which included;
* New Zealand business confidence at a record low going back 40 years.
* New Zealand had been in a domestic-led recession since the beginning of last year and the global crisis was now starting to hit the local economy.
* New Zealand was still only in the first stages of increasing unemployment - now at 4.2 per cent, Treasury was predicting it to rise to 6 per cent next year.
* The New Zealand dollar been hard hit by falling commodity prices and both would remain weak.
* The US housing market was still going backwards. About US$9 trillion of mortgage-backed securities were linked to the US housing market.
"The good news is that this isn't news. The market has gone a long way to pricing a very weak global environment. Last year it came as a bit of a shock," Wong said.
"Now everyone has got low expectations, so the scope for shock is a lot less."
Share prices were unlikely to fall to the same degree in 2009, he said.
Financial crises were protracted affairs, according to academic research by Carmen Reinhart and Kenneth Rogoff released earlier this month, said Wong.
However, monetary policy was more flexible than previous recession cycles, although the crisis this time was of a global nature.
Governments had been more pro-active and lessons had been learned from the Great Depression, he said.
About 44 central banks had responded to the crisis, and the US and Japan couldn't cut rates any further.
Inflation could remain a "dead issue" for up to 18 months, and deflation would become more of an issue, he said.
The challenge was to work out how much of the bad news was priced in.
And even in a crisis there was an opportunity to make money - the average bear market rally was 30 per cent in the Great Depression.
Value had improved in equity markets, but had declined considerably in other assets such as cash and fixed interest.
With global growth in the last decade fuelled by increased leverage, and more exposure to debt, deleveraging would be the story of the next five years, he said.
Consumers would spend less and save more, which meant banks would have a lot more conservative capital ratios, he said.
"Even if we bounce out of this recession through 2010 there are still a lot of growth hurdles to go through - five to 10 years perhaps, as deleveraging takes place."
- NZPA
