Falling interest rates to fuel equities: Morgan
Economist Gareth Morgan says the outlook for equity markets, particularly in the tech sector, is positive despite all the current volatility.
Tuesday, June 13th 2000, 12:00AM
Morgan, who was one of three presenters at a Tower Asset Management presentation in Wellington on Monday, said that one of the key factors that favoured a positive outlook was the likelihood that there will be further interest rates falls in the future.
While interest rates are considered to be at low levels now, they are above the long-term historical average.
"Long term real interest rates are well above the historical average which is about 2 per cent," he says.
Morgan says the prospect of a fall in interest rates is the biggest argument in favour of a continued run in equities.
He says that falls will start happening as economic growth begins to slow down.
Morgan says the current bull market is not without precedent in the investment world. He says periods such as the 1920s, 1950s and 1960s were equally strong bull markets.
"Technology (stocks) per se are no more overvalued than other firms," he says.
In fact the companies which are most susceptible to share price falls are the so-called old-economy shares, he says.
One of the key issues facing investors at the moment is the high price they are currently paying for assumed growth.
What many people are failing to recognise is that in many cases, particularly with tech stocks, earnings are being under-stated because investments in intangibles items are expensed and not depreciated and companies are making lower contributions to defined contribution schemes.
Allowing for these and other factors the corrected average market price/earnings ratio in the United States is more like 22.9 as opposed to 28.9, Morgan says.
Morgan says the current market volatility and the drop in tech stock prices is unlikely to cause a sharemarket price crash.
Morgan was one of three presenters at a Tower Asset Management presentation in Wellington on Monday. The other two speakers, Paul Bagnoli from US value managers Sanford Bernstein, and Marathon Asset Management (London) founding director Jeremy Hosking offered different views on the market. Stay tuned to Good Returns to see what they said.
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