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Home / Business / Economy / Official Cash Rate

Rate outlook offers stocks some respite

By by Ellen Read
25 Apr, 2005 09:47 AM3 mins to read

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Expectations the Reserve Bank will leave interest rates at 6.75 per cent this week will provide some relief to the battered sharemarket.

Interest rate increases reduce the investment allure of equities as they signal higher returns from cash and bond investments and also a headwind of higher interest rate costs
for listed companies on debt.

Since the central bank last raised interest rates in March, local shares have fallen 9.5 per cent - compared with a 4.5 per cent dip in global equities.

First NZ Capital strategist Jason Wong said half the fall reflected global factors and half local tightening in monetary policy.

Having given up the year's gains over the past week - following sharp slides in overseas bourses - the NZSX-50 gross index will again be in the spotlight.

Brokers say the market is "whippy" and likely to over-react in both directions to news, rumours and sentiment.

Some commentators say the local market is merely at the mercy of overseas leads while others say a so-called "correction" is overdue.

Forsyth Barr summed up last week's dramas: "What an unpleasant little week that was! After starting the week on a bad note with a 58 point fall on Monday, the [index] attempted to recover, but ended the week slightly below Monday's close, making a 63-point, or 2.1 per cent, fall for the week."

The broking house went on in its weekly research note to say that while small-cap stocks won the prize for most volatility over the week, mid caps fared worst in performance terms. "Profit downgrades, or the fear thereof, on the back of concerns of a slowing Australasian growth environment were a major influence on stock prices," the report said.

A bright note amid the gloom was the largest listed company, Telecom, which finished the week at $6, a 5c gain, as investors bought into the around 10 per cent gross dividend yield and relatively defensive nature of the earnings stream.

Wong said investors had two options. They could either switch to the stocks most battered by the slide or they could stick to the macro theme that has prevailed - that is, a slowing economy and consequent expectation that equities will under-perform - and continue to adopt a defensive strategy.

ABN Amro Craigs broker Matt Willis said some tentative retail interest was starting to re-emerge on Friday after the market's shakiness earlier in the week.

"There are signs the market is starting to get support relative to yield ... Sure there's a squeeze on profit margins, but it's not indicative of a recession." he said.

If it can push the cash-rate theme aside, the biggest news on the calendar is Friday's release of Contact Energy's first-half result.

Forsyth Barr analyst Greg Main forecasts an operating profit of $180.6 million - up 28 per cent on last year's first half - and reported profit of $83.2 million.

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