Markets turn to growth and long-term rates fall

Pie’s funds had a strong month, boosted by the swing from value to growth in markets. The US 10-year Treasury curve has flattened by 36 bps since March, which is favourable for growth stocks, and lower interest rates improve valuations.

However, I think markets will vacillate this year between worrying about inflation and higher rates and slowing economic growth which caps rates. Remember with interest rates, financial markets and central banks are focused on price inflation not price levels. Notably, inflation remains dormant in Europe still, with German bonds still with a negative yield.

Markets calm

Fed Chairman Jerome Powell’s phrase “we are talking about, talking about, when to raise rates”, while sounding eerily similar in vagaries to another former US politician, the late Donald Rumsfeld, who famously frustrated journalists with his “unknown unknowns” speech in 2002, did enough to calm markets to the point where long-term rates actually fell during the month. I feel I need to come up with one of these the next time I have a tricky question at the Pie investor days! Ultra long-term 30-year rates have declined from a peak of 2.5% a few months, back to close to 2% now. This is not indicative of a market concerned with runaway inflation.

Corporate net income to grow

Globally, consensus is for corporate net income to grow to US$5.1T in 2021. This is up from US$3.2T in 2020 and US$4.2T in 2019, demonstrating the robustness of the economic recovery, despite Covid-19 still being a daily problem for most countries. The investment team recently discussed the impact of the money supply on stock prices and how the boom since 2008, and again post-Covid, has really been fuelled by an ultra-loose monetary policy. The correlation is high. Increase the money supply, increase asset prices like the stock market. So while perhaps a television is cheaper today than it was in 2001, I require greater purchasing power to buy a house and have a meaningful share portfolio than I did two decades ago. Intuitively we all know this. So where to next? I think central banks can probably pause the growth in money supply, but not shrink it – they’d all lose their jobs. They’ve made their bed, now they have to lie in it. Therefore, we should expect that past behaviour is the best predictor of future behaviour and, as such, asset prices will be supported. Deflation is a central bank’s worst nightmare.

Covid continues

At the risk of sounding like a line from the Rick & Morty show, I will refrain from saying what I really think about the latest Covid stats, lockdown in Australia, and NZ escaping another round of Russian roulette. I’m surprised it’s taken so long to introduce pre-departure Covid tests for people travelling to New Zealand. A simple app, which requires travellers to have evidence of a Covid test within the last 24 hours, followed by a pre-boarding test for every passenger, could have helped a lot earlier on. C’est la vie. It’s all good to make comments from the cheap seats, but I wouldn’t want to be a politician with every decision scrutinised under the microscope that is the public domain.

As always, thank you for your support. If you have any questions please don’t hesitate to call me on
(09) 486 1701, or email me, mike@piefunds.co.nz.

Mike Taylor, Founder and CEO

Information is current as at 30June 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.