It is difficult to know where to start a column on the sharemarket turmoil, but the best place is probably with the technical definition of a bear market.

A bear market is when the benchmark index has fallen 20 per cent or more from its 12-month high, whereas a correction is when the index has declined between 10 per cent and 20 per cent.

Based on this criterion most Asian markets have entered the bear stage, but the New Zealand Exchange hasn’t.

As the accompanying table shows, eight of the 11 main Asian and Pacific stock exchanges are now bear markets based on their lowest closing prices in the past few weeks compared with their 12-month highs.

Only Malaysia, which was down 11.2 per cent at Tuesday’s close; New Zealand, minus 16.9 per cent; and Indonesia, off 19.2 per cent, are not bear markets. Hong Kong and Japan, which have fallen 31.9 per cent and 31.3 per cent respectively from their 12-month highs, have been the worst performing Asian stock exchanges in the downturn.

Hong Kong’s performance is consistent with historical trends, which show that the best performing stock exchange, and companies, in a bull market usually experience the sharpest downturns when markets weaken.

Most of the damage occurred on Tuesday when share prices plunged and Australia, China, India and Taiwan became “bear markets”. Prices have made a strong recovery since then, but Tuesday’s closing figures have given 2008 a particularly ugly beginning.

The four main US and European exchanges have not been as badly affected, with three of the largest four falling by less than 20 per cent. The French market was down 21.5 per cent at Tuesday’s close, but London, Frankfurt and New York are still in the correction stage. The Dow Jones Industrial Average closed 16.2 per cent below its 12-month high on the same day.

The worldwide rebound on Wednesday and Thursday was strong, particularly as far as the Paris bourse was concerned. It surged 6 per cent on Thursday even though Societe Generale, the country’s second-largest bank, announced a vast fraud and sub-prime-related write-down of US$10.2 billion ($13 billion). Societe Generale was suspended from trading in Paris on Thursday.

Most of the positive and negative features of the capitalist system have originated in the United States, and the latest sharemarket downturn is no exception.

The root causes of the current situation are a combination of poor governance, lax regulation, corporate excess and greed.

William Martin, chairman of the US Federal Reserve Board between April 1951 and February 1970, believed that the main role of the Federal Reserve was to take the punchbowl away from the party when it became boisterous.

Alan Greenspan, who held this important position between August 1987 and January 2006, took the opposite stance. He kept putting more and more punch on the table when the party ran out of steam, and we are now paying the price for this.

The party atmosphere was fuelled by a deregulated financial system in which the top MBA graduates created exotic credit products that drove up asset prices, particularly residential housing.

These executives received enormous bonuses for creating high-risk credit products, but there are no bonus claw-backs when these instruments tank out.

According to Bloomberg, US$133 billion of asset write-downs and credit losses have been taken among the leading banks – before Thursday’s announcement of Societe Generale’s US$10.2 billion write-off – and most of the chief executives sacked as a result have received huge retirement payouts.

How can we continue to admire and support our corporate leaders when the ones that make the biggest mistakes get the largest exit payouts?

Countries with deep-rooted economic problems and serious problems in their financial institutions usually suffer the most in an economic and sharemarket downturn. New Zealand was a good example of this in the 1980s.

The corporate and financial sectors embraced a borrow-and-spend philosophy during the 1980s, and investors experienced large and sustained losses as a result. In addition, the Bank of New Zealand had to be bailed out by the Government after experiencing substantial corporate loan losses.

The old NZSX50 Capital Index, the benchmark at the time, has never returned to its September 18, 1987 high of 3968.89.

(The new NZX-50 Gross Index, which has an upward bias because it includes dividends, has passed the September 1987 figure but has dropped below it in recent months.)

It is important to note that even though the old benchmark capital index has not returned to its original level, the last decade has been a fantastic period for NZX investors.

Australia was relatively more restrained than us in the 1980s, and its benchmark index returned to its pre-1987 crash high in February 1994, while Wall Street’s Dow Jones Industrial Average had fully recovered by August 1989.

Japan also experienced a bout of irrational exuberance in the late 1980s and early 1990s.

The country recorded strong economic growth in the 1980s and early 1990s, partly because of a buoyant, debt-fuelled property market.

Tokyo’s Nikkei 225 Index surged from 9830 in February 1984 to 38,713 on the first day of trading in 1991.

Japan has never fully recovered from the property price bubble. The Nikkei 225 Index went below 8000 in 2003 and closed at 12,573 on Tuesday, still 68 per cent below its 1991 high.

The United States economy and its financial institutions are the main cause of the current problems, and the world’s largest economy should suffer the most and the longest. However there are two important observations about the US:

* It has a tremendous ability to recover quickly from an economic crisis with the notable exception of the 1929 crash and 1930s depression. The heads of poorly performing banks have been sacked and balance sheets repaired through the injection of capital from sovereign wealth funds.
* Most of the problems are confined to the United States, but this still impacts on the rest of the world because the country represents about one-quarter of global GDP.

New Zealand is in a much better position to weather this storm because our financial institutions, with the notable exception of finance companies, are in a strong position and the Government and Reserve Bank have adopted sensible policies.

Reserve Bank Governor Alan Bollard has been a strong believer in the William Martin philosophy and took away the punchbowl when the party got boisterous.

This should stand us in good stead in the months ahead.

New Zealand is not immune from an economic slowdown because of the high level of personal debt and the country’s large current account deficit. Our best outcome would be for the United States to resolve its problem quickly and decisively, for Australia’s growth to remain on track and for the NZX’s full recovery to take no longer than Wall St after the 1987 crash.

 Asian/Pacific sharemarkets: Eight out of eleven are “bear markets”



12 month high 

Lowest close 







New Zealand 

NZX50 Gross 





Composite Index 





BSE 30 





Seoul Composite 





Taiwan Weighted 





All Ordinaries 





SSE Composite 





Straits Times 









Hong Kong 

Hang Seng