Economic uncertainty spreads fear among investors

Multi-billion dollar fraud charges and a collapsing dollar sent the SMI below 5500 points Keystone Archive

Ripples of fear spread through the Swiss investment community in a week marked by uncertainty and lost confidence in the global economy.

Multi-billion dollar fraud charges at the United States telecommunications giant, WorldCom – coupled with news of a collapsing dollar – sent investors reeling, pushing an already weak Swiss Market Index (SMI) below the psychologically important 5500 level on Wednesday.

Reports that the US office equipment giant, Xerox, had massively inflated its profits are likely to leave even more investors fearing that balance sheets at corporate headquarters around the world are rigged.

“Public and shareholders’ trust in large companies has begun to erode dangerously,” said the Swiss justice minister, Ruth Metzler, on Monday at the Swiss-American chamber of commerce.

“And any further erosion could undermine our economy,” she added.

Better times ahead

But suspicions over corporate accounting practices were not the only reasons for this week’s economic downturn. A weakening US dollar had investors worried about Swiss corporate earnings and the consequences of another recession in the US.

On Wednesday, the only colour traders saw on their computer screens was deep red, as the 27-share SMI fell below levels not seen since September 2001.

“Swiss investors fear they are facing a double dip recession in the United States,” said Jon Poser, an economist at Bank Sarasin.

“But we don’t believe there will be one. That fear is exaggerated,” he told swissinfo.

Economists believe that revised US GDP figures published on Thursday – which showed the US economy grew by 6.1 per cent in the first quarter of 2002 – will help the SMI recover, since the US is considered to be the “growth locomotive” pushing the world economy forward.

“We expect to see a strong rebound, especially because the US economy is showing that it is sound. The reality of that will lift stock prices,” said Poser.

Analysts believe the SMI dropped as far as it did as a result of market panic and not because of concerns over the financial health of those companies listed on the exchange.

Corner turned

But as WorldCom’s apparent $3.8 billion deception dealt yet another sharp blow to corporate confidence, analysts believed that a corner may have been turned.

“I think a solution will come soon with respect to the recent crises,” Bernhard Waxenberger, an economist at the University of St Gallen, told swissinfo.

“Investors will wake up and go back to old values of trust, loyalty and ethical business,” he added.

It is widely believed that the stock market hype that marked the 1990s – a period during which investors could expect short-term returns of between 50 and 100 per cent – fuelled greed and changed corporate behaviour.

“In the new economy, individuals have incentives to boost earnings in the short term, to make their companies look more attractive in the market, which in turn boosts share values and thus personal wealth,” said Waxenberger.

Shaken confidence

Analysts believe shaken confidence – take the case of WorldCom stockholders who have seen the company’s share value drop to 15 cents from $60 earlier in the year – will lead to a return to the old ways of doing business.

“This could be the start of a grassroots movement where people push their institutional investors – who essentially represent the interests of individuals – to make less risky, more stable, investment decisions,” said Waxenberger.

The Swiss Stock Exchange’s new code of conduct, which comes into effect on Monday, is expected to improve investor confidence and act as a signal that the Swiss financial authorities are eager to increase transparency.

Switzerland is trying to improve current rules and accounting standards in the light of high-profile corporate collapses such as last October’s demise of Swissair.

“The new code of conduct is a very positive move for investor confidence, which needs to improve after the recent financial scandals,” said Poser.

by Karin Kamp