2/8/2021 11:00:00 PM

Market Watch Episode 51: Three big risks to a 2021 stockmarket boom

We're only one month into the year and already it feels like the markets have been around a roller-coaster and back.

But with investor interest running hotter than it has in years share markets remain very much in the grip of a boom - or what some are already calling a bubble. Should long term investors be nervous?

Three key factors for optimism

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

"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 US president Joe Biden has proposed a US$1.9 trillion stimulus package which has 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," Taylor says.

In theory they should be able to keep things buoyant for the next year or two. "But there are risks to that story."

In fact there are three big risks to the current bull market, Taylor says.

Two are directly Covid-19 related and the other is indirectly related to the recovery story.

The first is that the lockdowns have to continue for longer than anticipated as the world grapples with the logistics of producing and rolling out the vaccine, as well as virulent new strains of Covid-19.

Interest rates and inflation are hot topics

The second risk is one that seasoned investors are increasingly on alert for, is that interest rates rise faster than anticipated.

"Every one is worried about interest rates and inflation at the moment, that's the hot topic," Taylor says.

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

Markets currently believe that the 10-year rate will stay below 1.5 per cent.

"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," Taylor says.

"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 start to rise then areas of the market that are full of speculative money, will be vulnerable Taylor says.

So that would include hot tech stocks like Tesla and Bitcoin or generally companies that are valued on a revenue multiple rather than a profit multiple.

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

And if the vaccines don't work?

The third and hopefully least likely risk was that the vaccines just don't work as expected.

That would be a real "black swan" event, Taylor says.

"At that point we'd need to consider a plan B," Taylor says. "So what does the world look like with Covid in the community, much like we have the flu. What is our plan for that?"

Kiwis 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 Market Watch video series is produced in association with Pie Funds. View the original article here.

To download our product disclosure statements, go to www.piefunds.co.nz. Past performance is not an indicator for future returns. This information is general in nature only. You may wish to discuss with an expert before relying on it.