Friday, 16 Apr 2021

Market Watch: Why good news is bad news for sharemarkets

Good news about vaccines and potential Covid recovery have hit sharemarkets in the past few weeks.

At one point the NZX-50 was down more than 10 per cent from January highs – a technical correction.

“It’s a funny situation when good news becomes bad news,” Pie Funds chief executive Mike Taylor told Market Watch.

“The good news so far is that vaccine rollout is proving to be effective. The outlook for global growth in 2021 and beyond is starting to look quite promising.”

But that had meant that long term bond yields – for 10 year interest rates – had risen sharply in places like New Zealand and the US.

In New Zealand they rose from around 0.5 per cent to as high as 2 per cent late last week.

Bond investors were requiring a higher rate of return and that was flowing through to equities, Taylor said.

So the bad news for share investors was that the local NZX-50 had dropped away by about 10 per cent.

In the US high growth tech stocks were also coming under pressure.

The New Zealand market was underpinned by dividend stocks which returned a yield so when bonds yields rose the value of dividend stocks tended to fall, Taylor said.

But the other thing being sold off around the world was high growth stocks – companies that weren’t really earning anything but high valuations because interest rate returns were so low.

While real recovery from the pandemic may still seem some way off investors were always trying to stay ahead of the curve, Taylor said.

“Central banks have said they will keep short term rates on hold. If you think about the GFC, the Fed [US central bank] didn’t lift rates for about five years.

“We’re still in Covid so it could be some considerable time before rates at the short end rise…but we are going to see longer term rates rise.”

It could be a tricky time for investors with the sharemarket index gains of the past few years behind us but bank deposit rates still low.

Taylor said he expected to see bubbles continue to flair up in speculative investments like bitcoin and in trending stocks like the spike in US retailer GameStop.

The recently approved US Federal Government stimulus of US$1.9 trillion also had to flow through the economy, he said.

“We’re in for another year of volatility, that’s for sure. We’ve already had a lot in the first two months. Expect more of that.”

We should be prepared to see interest rates rise as the global recovery takes hold, he said.

– The Market Watch video show is produced in association with Pie Funds

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