THE share market hits post-1987-crash highs, the inevitable question is: how long can it last? All investment carries some risk. Even keeping money under the bed has risk (witness this week’s bushfires). The important thing for Australia is to ensure that investment risks are reasonable and not made unnecessarily high through speculators. Somehow, Australia has to ensure the greed-is-good mentality of the 1980s does not return. It led to the crash and five years of justifiable wariness on the part of investors.
As the market moves up it is worth recalling some of the lessons of 1987. Among the biggest losers were those who invested in companies founded on the sand of paper profits and borrowings. Those who invested in companies with lower borrowings and real assets had far lower losses. The paper-profit companies are either now non-existent or have share prices a tiny fraction of their pre-1987 high.
There is widespread optimism around at the beginning of 1994. If enough investors reject companies that try to create paper castles out of this optimism, there will be no paper castles, or at least fewer of them than in 1987.
Another lesson is that the share market should not be solely about capital gain. Dividends are important, too. Indeed, they should be more important. In the couple of years immediately after the crash, solid companies returned good dividends for those fortunate enough to have invested after the crash.
If enough investors pursue companies that return good dividends based on profits made from sale of product rather than profits based on paper, once again companies will be starved of the food for speculation.
Human nature, however, is not like that. The best we can hope for, perhaps, is that 1987 is in such recent memory that sufficient fear will temper investment habits to cool specualtive ardour. It is a shame that speculators cannot be driven to the casinos (there is one in nearly every capital), leaving the sharemarket for its true purpose _ to raise capital for productive investment.
Governments, of course, can help in creating an environment more friendly to investment and more hostile to speculation. There are some good signs. The Government is working towards its April industry policy. The direction of that policy is likely to be indirect help virtually across the board. Industry policy should avoid picking winners, or sheltering companies from competition in particular industries. Those policies have failed. Rather they must address what seems to be a fundamental difficulty in Australian capitalism _ converting the great idea into a production line. To that end databases to help small business with bureaucratic, financial and technical matters, export promotion assistance, start-up tax breaks and help with attracting capital are important. These sorts of policies help companies get established and help them compete and are available to all. They contrast with the industry policies of the past which have helped only a limited range of companies or have concentrated on shackling opponents rather than encouraging competition with them.
The Government is working on these issues. The Opposition should be doing something similar. It should not just be dismantling Fightback. It should be creating an industry policy, not waiting to pick on the Government.
The Government’s industry policy needs to be coupled with more work on micro-economic reform and industrial-relations reform. These things will create more confidence and help ensure no repeat of 1987. Instead, there will be modest growth in profits, share prices and dividends.
One reason for optimism is the larger number of “”retail” or family investment in the share market, notably with the big Commonwealth Bank and Woolworths floats. This group is less likely to speculate or move its stock about. It adds to share market stability. The group also creates some latent political pressure for an effective industry policy; they will be quick to blame the Government if their share prices fall.