Markets warned of three risks

WELLINGTON: We are only one month into the year and already it feels like the markets have been on a roller coaster.

However, with investor interest running hotter than it has in years, sharemarkets remain very much in the grip of a boom — or what some are already calling a bubble.

Should longterm investors be nervous?

In the short term, the booming stock market retained some significant tail winds, Pie Funds chief executive Mike Taylor said.

‘‘Things such as low interest rates, pent up demand, particularly from people in the northern hemisphere from people who are stuck at home and wanting to get out again and spend money. And then you’ve got massive stimulus still to come.’’

New United States President Joe Biden had proposed a $1.9 trillion ($NZ2.6 trillion) stimulus package which had excited Wall Street and largely outweighed fears about tax hikes and new regulation.

‘‘So those three factors make me reasonably optimistic and positive for markets, particularly about the second half the year,’’ Mr Taylor said.

In theory they should be able to keep things buoyant for the next year or two.

However, there were three big risks to the current bull market, Mr Taylor said.

Two were directly Covid19related and the other was indirectly related to the recovery story.

The first was that the lockdowns had to continue for longer than anticipated as the world grappled with producing and rolling out the vaccine, as well as new strains of Covid19.

The second was one seasoned investors were increasingly on alert for: interest rates rising faster than anticipated.

‘‘Everyone is worried about interest rates and inflation at the moment; that’s the hot topic,’’ Mr Taylor said.

Ironically, inflation coming back into play and forcing central banks to lift rates would be a symptom of a successful Covid19 recovery.

Markets currently believed the 10year rate would stay below 1.5%.

‘‘The concern is that if everything works, the vaccine is effective and everyone is back out in the community and then we have this massive amount of stimulus, that’s going to be huge fuel for the fire, for the world’s economies to kick on and grow,’’ Mr Taylor said.

‘‘That has to be inflationary. So what do central banks do then? Do they raise rates or stick to the rhetoric of no hikes until 2024?’’

If rates started to rise, areas of the market that were full of speculative money would be vulnerable, Mr Taylor said.

That would include hot tech stocks such as Tesla and Bitcoin, or generally companies that were valued on a revenue multiple rather than a profit multiple.

Safer areas of the market would include more traditional manufacturing or energy companies.

The third — and hopefully least likely risk — was that the vaccines just did not work as expected.

That would be a real ‘’’black swan’’ event, Mr Taylor said.

‘‘At that point we’d need to consider a plan B,’’ he said.

‘‘So what does the world look like with Covid in the community, much like we have the flu? What is our plan for that?’’

New Zealanders in particular had become used to living without the virus, but even if the vaccines were relatively successful we would still need to learn to live with it as soon as borders were opened. — The New Zealand Herald

❛ Every one is worried about interest rates and inflation at the moment; that’s the

hot topic