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Two investors, two views on whether to increase or decrease your exposure to shares as the market rallies

Two investors, two views on whether to increase or decrease your exposure to shares as the market rallies
Image sourced from Pick Pik

Unemployment is rising, countries are battling their second waves of Covid-19 - if in fact they overcame their first waves, governments are piling on the debt, and there’s basically nothing certain about anyone’s future.

Yet, share markets, including the NZX, are booming.

Interest.co.nz spoke to Summer KiwiSaver investment committee chair, Martin Hawes, and Craigs Investment Partners head of private wealth research, Mark Lister, about how retail investors should approach what looks like a distorted market.

Their views (which shouldn’t be taken as financial advice) differed.

Hawes said Summer KiwiSaver was reducing its exposure to equities, taking a more cautious approach in the short to medium-term.

Lister was increasing his exposure to equities, saying traditionally “safe” assets like cash and fixed interest look riskier with interest rates rock bottom.

What’s the main thing that could cause share markets to head downhill from here? Hawes and Lister were on the same page: central banks around the world changing tack and tightening monetary policy to increase interest rates. 

Why would central banks do that? If there were signs of inflation running too high.  

But haven’t central banks been struggling to boost inflation since the 2008 Global Financial Crisis? Yes.

Accordingly, Lister believed there was a “pretty low” risk of strong inflation.

“I’d rather take my chances with the share market than stare down the barrel of a 1.5% return,” he said.

Meanwhile Hawes was a little more cautious: “It’s very difficult to see how this is going to play out… The batteries on my crystal ball have gone flat.”

That’s the overview. Let’s start from the beginning.

What are share markets actually doing?

US and New Zealand share markets are among those at, or near, record highs. The rebound from the March plunge was much stronger than many anticipated, with second waves of infection not dampening investor confidence.

However, Lister and Hawes pointed out headlines around indices reaching record highs paint a misleading picture.

Looking to the US, tech stocks are going gangbusters, boosting the likes of the S&P 500.

In New Zealand, the same can be said for the likes of a2 Milk and Fisher and Paykel Healthcare. Lister said these two companies alone make up almost 30% of the S&P/NZX 50 index and are “almost single-handedly” dragging up the market, while retail and tourism companies are doing it tough.

“You don’t have to look very hard to find some share market carnage. It’s just that all of the businesses on our market that are in those sectors that are taking a beating are relatively small and they don’t really move the dial in comparison to the heavy-weights that are all doing well,” Lister said.

He noted the average share price change across companies in the NZX top 50 over the past year was about -10%.

“[The NZX] is not a perfect reflection of NZ Inc. What’s NZ Inc made up of? A whole bunch of small businesses - many of which are in construction, retail, hospitality, tourism. Very few of those businesses are represented on the share market,” he said.

Lister noted the share market is tilted towards property, utilities, health care and agri businesses which “happen to be quite resilient”.

Why the strong rebound overall?

Hawes put this down to two acronyms: FOMO - ‘fear of missing out’, and TINA - ‘there is no alternative’.

Lister maintained the fiscal and monetary stimulus provided by governments and central banks around the world has been larger than expected. Meanwhile the economy, in New Zealand at least, has fared better than expected.

Interventions by central banks, like quantitative easing, have seen interest rates fall to encourage borrowing and spending, and reduce the burden of debt.

But they’ve also made term deposits and fixed interest hugely unattractive.

For this reason, Lister maintained opting for the equity market was a “no brainer”.

Is the share market a bubble?

“When the benchmark interest rate has gone down so dramatically that means you’ve got to re-price assets across the board. And I just don’t think we’re seeing the signs of exuberance we’ve seen in previous bubble periods,” Lister said.

“Are we in expensive territory? Yes. Are we in over-heated territory in places? Yes. But bubble? No.”

Lister came back to his point that equities still look like better value when compared to other asset classes.

Hawes was less definitive, once again saying a lot hinged on one’s view around where inflation is headed.

He did, however, note that with New Zealanders continuing to contribute to KiwiSaver, and people looking to other investment options as their term deposits roll over, there’s “huge weight of money” headed towards the share market.

Will indices continue their steep climb?

Hawes said investors have had a good run with the large strong performing companies, so might start moving to smaller companies, like the healthcare firm EBOS for example.

“One of the big fights that’s going on, is the ability for companies to maintain dividends. Those that can, are tending to do better than those that can’t,” Hawes said.

Lister said: “The easy gains are probably behind us. We’ve seen the markets rally 40% or 50% since late March. You’re not going to get that again anytime soon… don’t expect the next six or 12 months to look like that again. That was a one-off snap back from low levels.

“From here, you’re back to a grind upwards.”

Lister expected returns in the mid-single digits - slightly below the NZX’s long-term average.

“The value of the company is not just what happens in the next 12 months… next year is only one year out of the next 10 or 20,” he said.

Meanwhile, Hawes said: “I think there’s a big enough chance of significant volatility to be somewhat slightly underweight to shares. My worry is that there are a lot of inexperienced investors going in, boots and all, at the moment.

“Overall, I think it’s a very good thing people are seeing shares as a viable alternative. My worry is that they will get a little bit too gung-ho and have pretty much everything on shares and have maybe loaded up credit cards or other borrowings to buy them.”

While Hawes was fairly certain investors with long horizons wouldn’t regret buying now, he said the outlook was “very uncertain” in the short term, and even in the next three to five years. 

“There are likely to be quite big economic adjustments,” he said.

What would it take to stop the growth?

Hawes and Lister noted outbreaks of Covid-19 weren’t giving investors the jitters.

“People are seeing that resurgence of virus numbers as an annoyance, rather than something that’s going to bring the world back to its knees,” Lister said.

However, should governments/central banks run out of steam in terms of their financial responses to these outbreaks, Hawes and Lister maintained there would be cause for concern.

As for the risk of central banks increasing interest rates, Lister noted the US Federal Reserve’s major decision last week to target an average rate of inflation, rather than a fixed rate, means it could let inflation run a little hotter for a short time, before taking action.

Lister said, “What it does do, is it gives investors in places like America confidence shares are the only game in town for the foreseeable future, and we don’t need to worry about our central bank hiking interest rates and destabilising things. So for them, it’s game on.”

While the Reserve Bank of New Zealand already targets an inflation range between 1% and 3%, the Fed’s move will prompt other central banks to likewise be more relaxed should inflation finally bubble up.

Hawes believed news around vaccine trials failing could also take some steam out of the market. Lister disagreed.

Coming back to where we started, noting the disconnect between the “real economy” and the share market, Hawes clarified shareholders benefit from high share prices, not the company as such.

A high share price might help the company raise capital at a better price, but that’s about it.

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48 Comments

Literally just this morning went to set up margin facilities in order to go short.

have fun getting burnt! :D

Maybe. Haven't pulled the trigger yet. It's a tricky game to be sure.

Plenty of ways to go short

:)

Trend is your friend :)

If Lister says the main board of shares are at their maximum until early next year when you will see a steady climb is a sensible calculated economic outcome as it has happened in the past.
The problems are our market is influenced by the Dow, as are other share markets around the globe, and because of the bumpy ride they are having is causing our market to fluctuate enormously. It is primarily due to the election and related issues. The other thing is Hawes comment about NZ Companies not paying a dividend - due to Covid 19 trade disruption - which is fundamental for kiwis wanting to become investors.

Plenty of companies are still paying dividends.

I have a few shares in NWF which have given me an 8% return this year after tax and still earning plenty of money every day the wind blows,, which is most day , a great company that's going places...

Haha, careful with trends MM, looking back is no guarantee of future performance. It's a very dangerous way to invest, but then investing in equities is inherently risky anyway but I personally wouldn't subscribe to trend or "technical analysis" (a fancy name for trend buying) to make a call

Um, no... technical analysis is not simply 'trend buying' It's simply a series of tools to analyse price and volume charts

Like all tools - they are only as good as the person using them, and likely >90% of people using it fail to use it successfully

Made a fair bit this year on speculation, selling short (and despite doom and gloomers here). But I'm more cautious now.. when speculation reigns it's good to go with your instinct. Now that's behavioural economics.

Simple trading analogy that is as usual - only partially true

Beware, markets have a tendency to stay irrational longer than sane people can stay liquid.

Irrational exuberance...stay tuned

Lister maintained the fiscal and monetary stimulus provided by governments and central banks around the world has been larger than expected. Meanwhile the economy, in New Zealand at least, has fared better than expected.

RBNZ is threatening to cut the OCR by more than half in the future, after cutting it in half five times since July 2008. There is a rush to capitalise the prospect of higher present values of cash flows associated with assets.

Will stick to what I know - PM’s
Sooner or later there has to be a day of reckoning, meanwhile the can keeps being kicked down the road. JMO.

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Hawes' "The batteries on my crystal ball have gone flat" - he rilly, rilly needs to talk to the Green School. Their crystals don't need Batteries.....

... especially now, with the help of $11.7 mil. of free taxpayer's money, courtesy of the Greens.

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Compared to how many dollars ploughed int racetracks,

or stolen (as the commons) from the electors of Canterbury by National?

Let's be having truths with truths, eh?

The difference is that behaviour is expected from NZF.

I actually think Shaw is a decent guy and got this grant approved for what he thought were the right reasons.

i think he got swayed by it being a GREEN school and fits with green party philiosphy about nature except it is also a private school which does not fit with the growing left side of the party .
it now shows which side is in charge of the green party and they are more a far left party than green party now
https://greenschool.nz/gallery/

Agreed delboy, it's a shame Shaw has done this. He was about the only genuine sounding Minister (apart from Reti). I think he let his "Green" twin overrule his "what's everyone gonna think" twin. Hope it doesn't cost him his position in the Party, if it does then the wolf just dropped it's camo

Shaw has to go. The Green School doesn't even have full private school registration yet https://www.rnz.co.nz/news/political/424949/treasury-opposed-green-schoo...

tell it for what it is. Pure politics. He should resign. All we have heard are mealy mouthed excuses because he got caught with his hand in the Cookie jar Desperate attempt to by votes

Corruption is OK and forgivable if it's in the name of [insert preferred deity or cause]

foutunr. Its a bit like Orivida all over again, isnt it. These politicians just carn't keep their fingers out of the lollie jar. I am sure Crushers husband will make a comment. She says she carn't stop him from saying what he wants. I understand then this has been going over their 41(?) years of marriage. There must have been a many occasions of pots and pans thrown around during their arguments. I wonder if they had a high turnover of neighbours.

Like Oravida?

How would Shaw receive personal financial benefit from signing off on that? The Oravida saga appeared to anyone partaking of critical thinking as outright abuse of power for personal financial gain.

But are you suggesting Shaw would somehow gain financially from a school receiving development funding? Is he a shareholder?

Indirectly, Shaw is benifiting financially as his party is waving a flag for a Green initiative that could revolutionise the way NZ schools operate at a future timing.
The way he has backed down from this path by apologising profusely and advising he was not totally briefed on this case refutes part of my statements in my first paragraph.

It's true that a Green politician pushing for green initiatives and funding for them could benefit them politically (less so, now). But that would put in the same basket all politicians who allocate funds to initiatives their voters are in favour of, e.g. National to farm irrigation.

Quite different to Collins' potential personal benefit from helping her husband's company.

I was talking to mates who are buying Tesla calls despite the massive increases. They are betting but it's not like the market is working off anything related to fundamentals. It's all herd behaviour.

Good luck to everyone taking a punt, but don't get caught in a short squeeze.

Agreed. But when the herd turns...

"it's not like the market is working off anything related to fundamentals. It's all herd behaviour."
I don't think this is a recent development...

So concentrate on understanding the herd.

https://thereformedbroker.com/2013/04/27/my-edge-and-the-crossroads/

Berkshire Hathaway has just poured USD6-7 billion into the most conservative of Japanese companes: the 5 leading trading houses. I can't imagine this kind of move being recommended by Lister or Hawes (or any other Kiwi investor). I can't imagine any Westener investing in Japan or Japense companies.

I have thought about why BH has done this. And it's a different reason for investing in many Anglosphere companies, particularly those in NZ or Australia. I think my reason is right.

https://edition.cnn.com/2020/08/31/investing/berkshire-hathaway-warren-b...

All those 5 companies are sitting on massive cash reserves. Furthermore, all those companies are experienced with and involved in massive infrastructure projects across Asia.

Stay, hold and accumulate. Vaccines are on the way, normal life is not very far off, Trump will be re-elected.
Airlines and Cruise lines will start operating once vaccine is developed.
If one is gutsy, one can see good returns by December and more next year.
Mother Nature is not that Cruel. She will let you live and prosper.
(Not an investment advice, just my opinion)

She is entirely ambivalent.

But if you dig too much, consume too much, excrete too much, she will pull you back in line. You are just a member of an overshot species, planet-forcing in its impacts. If that is what you mean by prosper, sorry, it cannot be continued. So she won't.

SmoKey. Only suggested addition to your 'hold' strategy is to use this period to carefully review your base propositions for buying in the first place. Do they still hold, true? If not this period of volatility is a great time to reposition, enhanced by the sharesies crowd tipping their cash in and supporting bloated valuations on some sunset stocks, trapping unwary stock holders into complacency.

some have been hammered ie tourism, retail
example auckland airport is down 30% but if you brought when they bottomed out you are already up $1 and within two to three years ways will be found to allow more travel and they will recover more it may take five + years to get back to $9 per share
so the choice put it in the bank for next to nothing or put in auckland airport and maybe get 10% over two years, its still a good company and will always make money especially as domestic travel comes back and they keep expanding commercial buildings and the undeveloped land they own

We are near to a major disruption in air travel as small 2-10 passenger planes and air taxis that will be entering service over next 5-10 years can undercut the operating costs and cut travel times compared to regional jets. These small planes can operate from small local airports or heliports circumventing the connecting travel time, and high (monopolistic) pricing of regional airports. I'd get the hell away from airports as an investment.

I really hope you're right, but airlines are pretty good at lobbying the US government.

It's good news in either direction at the US election.

Trump wins, business friendly, less tax maybe. Party continues.
Biden (read Kamala) wins, Democrat states re-open for business, riots stop, media stops cheer-leading Covid. Covid will "go away", to quote trump. Party continues.

Easy money is a curse for capitalism.
Back in the late 1980s, less than 3% of the companies listed on US stock exchanges were zombies. By 2018, 19% were.
Short-term rescue interventions by governments or central banks during a sudden crisis, such as the Pandemic, are one thing, particularly if they support the unemployed, but also if they unfreeze credit that had frozen up even for healthy companies.
But when these rescue efforts become long-term conditions where zombies are being propped up, and where more and more zombies are being created, and where existing zombies become even bigger zombies – that’s quite another thing.
And that’s precisely what has happened after every bailout. It led to long-term easy money and constant stimulus, even during the Good Times, that kept the zombies walking and multiplying, no matter what.
When the Pandemic came, there was a huge amount of risk already piled up, and an enormous record-breaking amount of corporate debt and the economy was crowded with zombie companies running around.
And the Fed with its bailout programs made all of those problems worse. It tries to eliminate the risk of loss of investors, and it keeps bailing out the riskiest companies,
Without this self-cleansing process, capitalism can no longer function. Risky things need to be allowed to blow up, investors need to be allowed to take losses, and yeah, markets need to be allowed to go wild, which reminds investors in the future to be more prudent.
These processes see to it that capital is allocated based on risk and productivity, and that unproductive cash-burn machines are restructured or dismantled so that they don’t clog up the economy.
Without that function, the economic system bogs down, stuffed with zombies that are hobbling from bailout to bailout, never really restructuring their debts and making investors take the losses.
This is based on the time-honored principle that something works, until it doesn’t.

https://wolfstreet.com/2020/08/26/the-zombie-companies-are-coming/

Love.. Show lot's of love for the property markets.

Bigoted people who refuse to buy and letting their nation down.

Show love and be kind..

Borrowing 11 times your income for 30 years for a rotting shed in Onehunga is an act of kindness.. for ANZ.

Stock market normally falls when least expected and everyone is carried away by bull run and are off the guard.

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The more I hear from people like Hawes and Lister, the more I am convinced that they know absolutely no more that any reasonably well informed individual. The entire article is a series of useless generalisations and many on this site, me included, could have penned something similar or indeed, better. A complete waste o f time.

The herd is gonna do what it does best: herd.

Meanwhile I am scooping up that what is on discount: the USD.

Good luck to all.

Days to the General Election: 21
See Party Policies here. Party Lists here.