Investors return to shares as returns outstrip bonds

Chris Timms
Chris Timms
United States investors are selling out of safe-haven bond markets and moving into riskier investments, such as shares, as the recovery in the world's largest economy continues.

The Dow Jones Industrial Index is a few points short of reaching the significant 17,000 mark and has shown gains for six consecutive quarters.

Craigs Investment Partners broker Chris Timms said as the US economy improved, interest rates on bonds would be overtaken by returns being offered on the sharemarket.

The Dow hitting new highs almost daily was a result of people who had held off investing for a long time returning to the market.

''The US seems to be past the early stages of recovery being seen in Europe. The tapering of bond buying by the Federal Reserve is removing the artificial stimulus, with the Fed believing the economy can start standing on its own.''

In contrast, the European Central Bank (ECB) was trying to stimulate the economy by forcing banks to lend money by introducing negative interest rates, he said.

Janet Yellen
Janet Yellen
The New Zealand market was more subdued because New Zealand's economy had been improving strongly. Investors were becoming more selective about where they invested.

As interest rates rose again this month, a ''trickle'' of people were likely to pull out the market and lock in solid long-term interest rates in banks and other financial institutions, Mr Timms said.

However, there would still be a certain amount of money flowing into the sharemarket as superannuation schemes continued to grow in value.

Also, as overseas economies improved, investors in those countries were likely to invest closer to home, he said.

Details of the ECB announcement overnight would be watched closely as the dust settled after the package was announced in June.

Mr Timms said the 24-member governing council was unlikely to take a fresh approach at its July meeting after cutting interest rates to record lows last month and revealing its 400 billion ($NZ623 billion) loan programme.

It was not clear how the central bank would enforce its loan policy, he said.

Clarification on how long the ECB intended to keep interest rates low would be a key to the take-up of loans, called targeted long-term refinancing operations (TLTROs).

Federal Reserve chairwoman Janet Yellen said in a speech monetary policy faced ''significant limitations'' as a tool to counter financial stability risks. Heading off the US housing bubble with higher interest rates would have caused major economic damage.

Dr Yellen reiterated her view regulation - not rate policy - needed to play the lead role in combating excessive financial risk-taking.

The International Monetary Fund last month said a prolonged period of ultralow US rates - near zero since late-2008 - had prompted a weakening in lending standards and risky behaviour by investors.

Bank of England chief economist Andy Haldane said raising interest rates was the bank's last line of defence against asset price bubbles as British house prices posted their largest rise in nine years.

Figures out yesterday showed house prices rose by nearly 12% in the year ended June and were more than 25% higher in London, the sharpest increase there since the eve of the 1987 financial crash.

Last week, the central bank set limits on how much most Britons could borrow to buy a home and required lenders to undertake more stringent checks on whether borrowers could cope with higher interest rates. New Zealand Institute of Economic Research economist Kirdan Lees said there were lessons for our Reserve Bank from the Bank of England's approach. Loans more than 4.5 times income could be only 15% of new mortgage lending.

''We like this approach to financial stability because it directly targets risk: can people afford to pay back their mortgage? In contrast, restrictions on the loan-to-value ratio [LVR] do this only indirectly.''

The Bank of England acknowledged it was not its role to control house prices. Nor was the policy designed to provide lower interest rates to help achieve monetary policy growth, Dr Lees said.

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