NZSX50 - Good News!

[Beagle]

2 year declines when they do happen can be a viscous thing with no mercy.

Nasdaq lost a whopping 90% of its value in the 2 years following the dot.com bubble burst. But that was ~ 20 years ago...lucky this time its different for tech stocks

For example. No accountant I know that's a skilled investor can understand Xero's share price whether they're a user of the software or not. I wonder why that is...could it be that the price of these sort of companies is VASTLY more than its really worth ? Surely not !

History never repeats regarding that 90% tech rout...or maybe something similar does

To me 2022 is the year investors demand "show me the money". No earnings or very high PE stocks are VERY vulnerable to a major retracement.

[Biscuit]

I expect 2022 to be a great year. Sure, there is actual inflation - remember a couple of years ago when everyone was talking about Japan's stagflation and twisting themselves into knots worrying about the lack of inflation? Some inflation is a good thing and easily reined in by increased interest rates. We actually need growth, demand, and higher interest rates to cushion the system for the downward end of the cycle. Employment rates are great, covid will be tamed by vaccination and border opening, businesses are either humming or poised to crank up once the borders open. The fear and doom on here has no rational basis.

[Rawz]

I do not understand why you would want to be cash when there is inflation?

I do not understand why stocks are drifting down?

I would have thought that the revenue lines of the companies I own will all increase with inflation. Sure cogs and expenses will increase as well but overall I expect it to be relative. At least my dollar buying power is increasing with inflation when sitting in equities vs sitting in a bank account

[Beagle]

I do not understand why you would want to be cash when there is inflation?

I do not understand why stocks are drifting down?

I would have thought that the revenue lines of the companies I own will all increase with inflation. Sure cogs and expenses will increase as well but overall I expect it to be relative. At least my dollar buying power is increasing with inflation when sitting in equities vs sitting in a bank account

I'll take that one.
Cash goes backwards with inflation but gives you valuable optionality when it comes to buying stocks at cheaper prices in the future.
Not everything will go up this year. I predict that for example the current white hot market for family holiday homes and boats will not last and if you want a fancy high end Riviera launch or a lakefront home in Taupo this is probably not the right time to do it.

If the market drops 15-20% this year and someone like me has a high allocation to cash they will lose a LOT less.
We live in very interesting times and the average PE of NZX stocks is still quite abnormally high by historical standards.

[Biscuit]

I do not understand why you would want to be cash when there is inflation?

I do not understand why stocks are drifting down?

I would have thought that the revenue lines of the companies I own will all increase with inflation. Sure cogs and expenses will increase as well but overall I expect it to be relative. At least my dollar buying power is increasing with inflation when sitting in equities vs sitting in a bank account

Inflation over a certain threshold is dealt with by increased interest rates. Increased interest rates act as a damper on the economy, reducing demand, providing a head-wind for companies.

[FTG]

....but never ever NZX has given two negative years in a row in last 20 years ...

Amazing. Over 20 years, that is quite an achievement for the NZX. One can certainly have some empathy with your sentiment. However, I would encourage keeping open minded to all sorts of different scenarios playing out. Market "rule books" aren't necessarily sacrosanct.

Here's a play on a market mantra that may be worth keeping in mind:

"Just because something doesn't appear to be inevitable, doesn't mean that it may not be imminent"

[Rawz]

I'm looking at a couple of charts on the RBNZ website and specifically looking for periods of raising rates and inflation.

Starting with rates, the most recent rate rising cycle i can find was a 5 year period 2003-2008

2 year mortgage rate:
https://www.rbnz.govt.nz/statistics/...mortgage-rates

From mid way through 2003 the 2 year mortgage rate goes from about 6% to 9.5% until it hits 2008 GFC time.

And inflation:
https://www.rbnz.govt.nz/monetary-policy/inflation

Goes from about 1.5% to 5% during the same period.

NZX50 Growth:

Now what does the NZX50 do during that time? Yahoo charts tells me from 01/01/03 to 01/01/2008 it increases from 1953 to 4041 i.e. 107%

Conclusion:

The market increases during raising rates/ and inflation.
Raising rates and inflation eventually leads to correction. However this could be 5 years away and 107% gain away... who can time that market? Who can sit in cash for that long?

Ps. hope the links work
Pps. wiser more experienced heads feel free to critique this post

[alokdhir]

I'm looking at a couple of charts on the RBNZ website and specifically looking for periods of raising rates and inflation.

Starting with rates, the most recent rate rising cycle i can find was a 5 year period 2003-2008

2 year mortgage rate:
https://www.rbnz.govt.nz/statistics/...mortgage-rates

From mid way through 2003 the 2 year mortgage rate goes from about 6% to 9.5% until it hits 2008 GFC time.

And inflation:
https://www.rbnz.govt.nz/monetary-policy/inflation

Goes from about 1.5% to 5% during the same period.

NZX50 Growth:

Now what does the NZX50 do during that time? Yahoo charts tells me from 01/01/03 to 01/01/2008 it increases from 1953 to 4041 i.e. 107%

Conclusion:

The market increases during raising rates/ and inflation.
Raising rates and inflation eventually leads to correction. However this could be 5 years away and 107% gain away... who can time that market? Who can sit in cash for that long?

Ps. hope the links work
Pps. wiser more experienced heads feel free to critique this post

I agree with your conclusion ...markets do not fear rates rising ...they fear recession . At present its inflation which means high demand and hot economies ...Central Banks will try to cool the economies not kill them ...though eventually rising rates beyond required do end up in recessions but normally that happens towards the end of rates cycles not at start ...while we reach the end of the cycle maybe 2-3 years away and in those years markets generally do well after the starting hiccups like we are experiencing now ...In USA they call is FED tantrum as market operators try to scare FED from being too aggressive .

We will be on slow grind up after the rates cycle actually starts moving up ie from April onwards .

What will be low and when to deploy your cash if u r in cash is not easy to decide . Long term holders just need to hold and let the companies handle this hurdle .

[BlackPeter]

I'm looking at a couple of charts on the RBNZ website and specifically looking for periods of raising rates and inflation.

Starting with rates, the most recent rate rising cycle i can find was a 5 year period 2003-2008

2 year mortgage rate:
https://www.rbnz.govt.nz/statistics/...mortgage-rates

From mid way through 2003 the 2 year mortgage rate goes from about 6% to 9.5% until it hits 2008 GFC time.

And inflation:
https://www.rbnz.govt.nz/monetary-policy/inflation

Goes from about 1.5% to 5% during the same period.

NZX50 Growth:

Now what does the NZX50 do during that time? Yahoo charts tells me from 01/01/03 to 01/01/2008 it increases from 1953 to 4041 i.e. 107%

Conclusion:

The market increases during raising rates/ and inflation.
Raising rates and inflation eventually leads to correction. However this could be 5 years away and 107% gain away... who can time that market? Who can sit in cash for that long?

Ps. hope the links work
Pps. wiser more experienced heads feel free to critique this post

Clearly a valid observation and consistent with current economic teaching of how economic cycles work. Having said that - not all tightening circles are the same.

What's different this time?

1) We might sit at the brinks of a new world war. I know - most people in 1938 thought this idea as well overblown, but look what happened. Nobody is stupid enough to start a world war - right? But then, replace in the history books Germany in the past with Russia today and Japan in the past with China today and we might have some fun in the years to come. What I am saying is - it might be worthwhile to check what markets did before and during WWII and try to combine these observations with your observations above.

hint: Stock indices went down until Hitler occupied Northern France in 1940 (reduction of uncertainty?) and then they went up again. However - rather thin trading throughout the war.

2) Not sure we ever have been in a situation before where interest rates like in 2008 would have already driven major world economies into default. Just have a look at what e.g. 10% interest rate today would mean for the US (or most European countries) to service their debts. It would close down many of the major economies ... and the only ways out I see would be either debt haircuts - which somebody would need to pay, or alternatively keeping inflation higher than interest rates (than its inflation paying back the debts).

Whatever it will be - it might have some interesting impacts on the world economy .... and while NZ sits far from the hot spots (both peak war and peak debt), I doubt our economy is able to decouple itself from the world markets, though - we might turn into the Switzerland of the South Pacific ... Switzerland did rather well during WWII by allowing any crook with enough money to take asylum. Just takes a bunch of capable politicians to navigate the wee ship through the storm. Oops - did I say that?

[JohnnyTheHorse]

Rearranging the simplest stock valuation equation we can see there are two main factors at play: Stock Price = PE Ratio * Earnings Per Share (EPS).

Inflation can be good and bad for EPS. In theory companies should be experiencing bottom line 'growth' simply due to inflation, so that's a positive. However they can get to the point that they are so constrained companies start to struggle to make money.

Inflation is (indirectly) VERY bad for PE ratios. I like to simplify things, so view PE ratios as how much free liquidity is there in the system looking for a home. Right now we have a crazy amount of liquidity, hence record PE ratios (SP500 at 36, whereas the average based of 140 years of data is 17). We also have the invention and boom in crypto, NFTs, SPACS... all more evidence that there has been too much liquidity and nowhere to put it. The two main things impacting liquidity are interest rates and QE. We are now in an environment where QE will taper and rates are literally skyrocketing. Higher rates change valuation models (DCF), make debt more expensive (pulling margin debt from stock market) and change the relative attractiveness of other investments (i.e. term deposits become more attractive vs a REIT paying 4%). All of this leads to a withdrawal of money from equities in general.

Raising rates essentially always leads to a recession too. We are in my view at the high point in this earnings cycle, so it's hard to see the EPS side growing (generally speaking, as there are certainly stock that will outperform). The real risk is when a recession hits. Say conservatively EPS only halves and the PE reverts to a mean of 16, that's over a 75% drop in valuations. Very feasible for EPS to drop further and PE to move into the 10 range... now becomes clear that indexes dropping 90% is actually quite possible (although that's most certainly not my base case!).

The NZX50 is in a bear market (based on my definition) and hence capital preservation becomes the goal. I still hold long positions, however these are carefully selected stocks I expect to outperform and I am actively hedging these with short positions at key levels. If I get the time I could do a detailed post of how I'm hedging in this environment if anyone is interested?