High bond yields rout equity market

Rising bond yields and the strong kiwi dollar continued to drag equity valuations down despite fairly upbeat earnings results from Freightways and Heartland Bank.

Monday, February 22nd 2021, 6:00PM

by BusinessDesk

The S&P/NZX 50 Index fell 122.39 points, or 1%, to 12,426.24. Within the index, 29 stocks fell, 13 rose and eight were unchanged. Turnover was $175.2 million.

Stocks in the benchmark index have fallen more than 5% this month as the yield on government bonds has exploded. Today, a 10-year government bond has a yield of 1.7% up from 1.1% a month ago.

This has led to a revaluation of equity assets which are priced in relation to the return from zero-risk assets such as government bonds.

Particularly affected are large, dividend-paying utilities such as Meridian Energy, which fell another 3% to $5.62 today.

Internet infrastructure firm Chorus dropped 3.6% to $7.76 after it reported a 2.7% decline in earnings as had been expected by analysts.

Matthew Goodson, a director at Salt Funds, said the drop in share price had more to do with rising bond yields than the earnings report.

On Wednesday, the Reserve Bank of New Zealand will release its first monetary policy statement since early November.

While no significant changes are expected, investors will be looking for any hints the central bank will raise the official cash rate sooner than planned, as inflation expectations have crept into the target range.

Goodson said since the economy had recovered strongly and low-interest rates had fuelled an “out-of-control” housing boom, the bank would come under pressure to raise rates.

“By any normal measure there would be absolutely no justification for keeping rates where they are,” he said.

But with other central banks keeping monetary policy ultra-loose, the RBNZ would run the risk of sending the kiwi dollar “through the roof” if it even signals tightening its policy.

The already-strong currency had an extra boost today as S&P Global Ratings upgraded NZ’s credit score to the highest possible score. It jumped a quarter of a cent to 73.34 US cents on the announcement before retreating to 73.09 by 5pm — still up from 72.11 on Friday.

This is bad news for exporters who earn US dollars, such as Fisher & Paykel Healthcare which dropped 3.3% to $31.87 today.

EBOS Group posted the day’s biggest decline, falling 3.8% to $28, after it missed out on being included in the FTSE Russell indices overnight. Infratil was added to an index, its share price held at $7.28.

Shares in Metro Performance Glass fell 4.5% to 42.5 cents after it warned earnings could fall as much as 24%.

Domestic logistics firm Freightways reported net profit of $22m for the six months ended December, down from $29.2m, although it resumed paying a dividend. Its share price fell 2.1% to $10.63.

Heartland Group Holdings lifted first-half net profit by 10.6% and said it expects the full-year result will come in at the upper end of guidance. The strong result was only just enough to stave off the sell-off, Heartland shares held at $1.89.

In currency markets, the trade-weighted index was at 75.39 at 5pm, from 74.69 on Friday. The kiwi traded at 92.77 Australian cents from 92.90 cents, 77.20 yen from 76.24 yen, 60.29 euro cents from 59.67 cents, 52.13 British pence from 51.67 pence, and 4.7235 Chinese yuan from 4.6663 yuan.

Tags: Market Close