Alice Webb-Liddall speaks to RNZ business editor Gyles Beckford about the language of markets and economics in relation to Covid-19.
Let me start by saying I am in no way a business journalist. I enjoy having money but the technicalities of how it works both before and after it’s in my bank account are mysterious to me, as are most of the technicalities of how it works when it’s in my bank account. I know little about what the stock market is, who Brent Crude or Dow Jones are, or how any of it has anything to do with me. But due to recent developments in our economy, and the general vibe that bad stuff is happening, I decided to try and learn.
Each morning, RNZ business editor Gyles Beckford is on the radio before I’ve wiped the sleep from my eyes. With a voice that sounds like he’s just eaten a jar of the smoothest marmalade, he gives New Zealanders a rundown of what’s happening in financial markets around the world and how it affects New Zealand and our dollar. And while I will always appreciate his beautiful, syrupy tone, often what he says makes little sense to me. At times like this, we’re hearing these terms more and more, and they seem more important than ever – so I went straight to the source, the veteran RNZ markets guru himself, to get a crash course in what Covid-19 is doing to our jargon.
The Spinoff: Given there are still only a handful of confirmed Covid-19 cases here, why has it affected us so much economically?
Gyles Beckford: It’s completely close to home. A month ago everybody was hoping it would just stay in China and a few other places. In the space of a month it’s gone from China through South Korea, Iran into Europe and now the States. New Zealand is lucky to escape with only a few cases, but because the world now is so interconnected because of global financial systems, and because globalisation means that trade is interconnected, the impacts have also been magnified.
The Official Cash Rate was cut this week – what does that mean?
If you have a floating rate then you can expect your mortgage payments will fall, but most of the mortgages in New Zealand are fixed-rate. For those people with a fixed rate the Reserve Bank of New Zealand cash rate cut won’t mean too much, because the banks haven’t been reducing fixed-rate charges. Most banks won’t move to lower their credit card charges, some may cut the charge on overdrafts a little bit … For a lot of people, this probably won’t mean too much in reducing their borrowing costs, and the Reserve Bank has been quite open about that. It will provide some insulation, some cushion to consumers.
Can you please explain to me what Dow Jones is?
The Dow Jones Industrial Average is an index of the big 30 companies [companies that represent a significant portion of economic activity, chosen by the editors of the Wall Street Journal] in the United States. Very early on when stock exchanges were being developed in the US, it was the benchmark for what was happening on Wall Street.
There are a lot of other indices that are a lot more representative. These other indices are just as important to watch and possibly give a better feel for the market. The other big two are the S&P 500 which is the 500 biggest companies on the New York Stock Exchange [and] the Nasdaq, which is where technology companies go, like Google, Facebook, Twitter and Uber. The indices give you the full picture of what’s happening with listed companies in the US.
When we talk about the Dow Jones or the S&P 500, we’re talking about it as a symbol for how the US share markets are performing.
In your business updates you often mention that these indices drop or rise by “points”.
You construct an index by taking a whole pile of different elements, in this case it’s the companies, and you give each company a rating. Apple will have more points in the index than, say, Gyles Beckford Incorporated because it’s worth more. Say Apple is worth 50 points, but Gyles Beckford Inc is worth one point. It’s all mathematical but they crunch all those numbers together and they come up with the index and that moves point by point.
More interesting is not the actual points numbers but looking at the percentage gains, because then you get a feel for the overall movement. You can understand a 5% move better than if I said the index went up 500 points to 27,200.
All three of the indices you’ve mentioned have dropped dramatically in recent days.
It’s massive, it’s the biggest fall since the big crash in 1987, it’s the biggest single session fall since then. These are financial markets that are in freefall and there seems to be little that central banks can do to reassure people that they don’t need to panic. People are not convinced by what is being said and done by the central banks or the measures that are being undertaken by the government.
Does this affect me?
It doesn’t have to matter to you, except a lot of money is going in and out of these markets so it’s driving what’s happening with currencies or with investment funds.
If you have a KiwiSaver account then it should be sort of interesting to you, more importantly what happens on the local market than overseas. But what share markets do directly affect are the returns that your KiwiSaver will have. Having an understanding and being aware of share markets and what they do can be useful.
I’ve noticed that the amount in my KiwiSaver has dropped hugely since about a month ago, should I be worried?
The fact is that professionals who manage the funds are scrambling to be able to cope with it, they know what’s going on, they have the experience. I don’t think that individuals should think that they can second guess everything that’s going on in the market and I don’t think that they should play a game of lotto with their Kiwisaver funds.
This crisis should prompt every person in KiwiSaver to be better informed about where their KiwiSaver fund is based, how it operates, and to review it. People have been very complacent about taking things for granted with KiwiSaver. It’s times like this that people need to educate themselves.
Gold prices and oil prices are two things that are always mentioned. Why?
They signal different things. Brent Crude oil [gets mentioned] because oil is so vital to the world economy. It doesn’t matter where you are – we need oil to make economies move. In terms of being a stand out commodity and one of the key elements of the world economy, we always need to know what the oil price is.
Gold is one of those things that’s partly historic because not so long ago a lot of currency was pegged to the value of an ounce of gold. Nowadays we regard gold as a safe haven… In times of uncertainty, when the financial deficits hit the fan, people go for gold because they see it as safe.
If we want a New Zealand equivalent, we might look at dairy prices, because they make up a quarter of all our exports and so many companies rely on that because it’s such a big part of our economy.
What does the exchange rate affect?
Most developed economies have currencies which they call “floating”. In other words, the market decides what the value of the currency is, they trade freely up and down. It’s always interesting and important to see where your currency is because when it’s floating it can react so quickly. In other words, people can dump your currency and say “we don’t want Kiwi dollars”.
At present, with the volatilities that we have now, the currencies that people want – the ones that are rock solid and regarded as the safest in the world – are the US dollar, the Japanese Yen and the Swiss Franc. If you’re a trader it’s important for you to know that if the New Zealand dollar goes down, the imports for materials I need for my business or the stock I need for my business will cost more. Conversely, if I’m a dairy company selling butter or dairy into China… that means I get more New Zealand dollars for the currency I sell in, so my export earnings go up. That’s why we quote them, so people can see how our currency is going.
What happens now? Is there any way to know?
The New Zealand share market after the 1987 crash took years to recover because investors were spooked, a lot of people lost money on very dodgy businesses. It’s a more substantial share market now, the companies in it are more financially secure, they are better run, they are real businesses rather than flimsy companies, so from that point of view you’ll have to expect that most of them will survive.
We just have to accept that you write off 2020. There will be no economic growth in 2020. Company earnings will be massacred in 2020. The emphasis will be on helping economies get through and survive and will be helping people in health and social welfare terms. Those will be the priorities, and then the hope will be that in 2021 the worst of it will be over. The impact will linger for some time. This isn’t a 12-month hit, this is going to be several years of pain and reconstruction and recovery.