Wary markets crawling with bugphobia
afr.com.au
By Roger Hogan and Robert Guy
Trading on Australian financial markets is expected to slow to a crawl after this
week as investors wary of the Y2K bug cut their transactions to a minimum.
Most fund managers and financial institutions are adopting low-risk strategies
in the lead-up to December 31, despite the bullish performance on Wall Street
and a stream of successful stockmarket floats in the past week. According to
Mr Richard Coppleson, an executive at stockbroker Ord Minnett, some fund
managers will not trade at all after Friday.
"Most Australian instos will be in, ready to deal, but expect either all of
December, or at least from mid-December, to be very quiet with very little
happening," Mr Coppleson said in a note to clients.
He said institutional equity investors were unwilling to risk their gains from this
year's 9.7 per cent rise in the All Ordinaries Index.
"Many of the principal trading brokers in the market are owned offshore and
they will wind back business and not risk their profits for the year in a period
that could be dangerous for position-taking," Mr Coppleson said.
"This period is generally when they argue with their offshore owners for their
Australian bonus pool no one is going to risk a year's work by trading in what
everyone believes will be [a market] as dead as Genghis Khan."
Australia's biggest investor, AMP, is one of the few institutions indicating it will
proceed as usual but French-owned Axa Funds Management, formerly
National Mutual, will close its open positions before Christmas.
Westpac Banking Corp, one of the biggest foreign-exchange and bond market
intermediaries, will limit itself to accommodating client orders.
"The industry in general is looking to minimise activity, but not so much in fear
of technological failure, but because it just seems prudent to be doing less
rather than more at that time," said Mr Bill Wilson, head of trading risk
management at Westpac.
Any portfolio manager at Mercantile Mutual wanting to trade after
mid-December will first have to explain his or her rationale very carefully to
chief investment officer Mr Geoffrey Martin under a new in-house policy.
BT Funds Management has set up a series of "directives" to deal with possible
contingencies.
However, the likely level of market activity in the lead-up to December 31 is not
as low as earlier predictions.
Some traders and investment bankers said that six months ago they feared an
earlier and even more severe shutdown, because of the harsh attitudes
investors were then taking to assets they regarded as particularly prone to
Y2K risk.
Transport to health-care company Mayne Nickless and general insurer HIH
Insurances were among the casualties.
According to one investment banker, a prominent institution declined in June to
take part in a $92 million bond issue linked to Mayne Nickless, arguing that its
technology-intensive health-care business made it particularly vulnerable to the
Y2K threat (the bond issue was backed by cash flows from one of the group's
hospital real-estate assets).
It also emerged last week that a planned capital raising for HIH had to be
postponed earlier this year because of investors' fears about the company's
exposure to reinsurance claims arising from Y2K-related events.
This early caution on the part of investors suggests, firstly, that their fear of
Y2K has been well discounted by the markets; and, second, that market
activity in the first quarter will soar if Y2K proves to be a damp squib.
The potential for this to happen is underlined by the fact that the average cash
weighting is just under 10 per cent of total fund manager assets.
In reality, the markets do not expect a major technological meltdown. They are
being prudent "just in case".
Offshore institutions "own" 34.1 per cent of the Australian market, so their
withdrawal will affect market liquidity. Domestic institutions and US hedge
funds should be available to take advantage of any volatility, however, such as
a major fall in the All Ordinaries.
Mr Gavin Stacey, chief strategist with TD Securities, an active player in the
Australian government and corporate debt market, said there was a trend to
move back to benchmark weightings ahead of the new year.
"A lot of places have the December 10-15 time-frame in mind in regard to a
pullback in activity, although I am not sure if it is written in stone as much as
the offshore players" he said. "There is a general feeling that people will scale
back their inventory to the bare minimum. After December 10, the need to hold
a bag of inventory is less compelling."
Mercantile Mutual's Mr Martin said the institution did not want to have trades
settling much after mid-December.
Colonial First State, like AMP, intended to proceed as normal. "Broadly
speaking, it is business as usual at Colonial. We recognise the market will be
thin and we will be keeping a very close eye on liquidity," said Mr Hans
Kunnen, head of investment markets research at Colonial First State.
"We are confident in our systems, those of our brokers and the ASX.
"We will be keeping an eye on what our investors are doing as we don't want
our funds to be illiquid. We are fairly confident, however, that the bulk of our
long-term investors will not panic and withdraw funds."
Colonial will be paying distributions early and will not have futures contracts
settling over the Y2K period. |
