Half-year reports will enable investors to work out for themselves if surge is about to become bust

Boom or  bubble?  There is a growing divide in the  investment  world between  those   who think the recovery from  the Covid-19 pandemic will add extra impetus to stock markets  and  those who think  bubbles are inflating to  bursting point.

At  the  beginning of the year global stock market indices hit  new  highs,  adding  another chapter, as one commentator  noted, to 12 months of  apparent defiance of  economic   gravity. The  surge  prompted  the London  “Economist”   to  ruminate on what it  called  the  “crazy  upward march in stock prices” and why it might just continue.

In assessing  why  markets  could persist in “melting up”  the Economist pointed to several factors  driving the gains:  an end  to the Covid-19 pandemic  is in sight; rich-world governments are  rediscovering  the joys of  fiscal pump-priming; and real interest rates  are  so  low  as to make  sky-high stocks look cheap. It noted,  too,  that markets had been looking beyond the damage from Covid-19 to the post-pandemic recovery.

The discovery of workable vaccines  seemed to bring that world closer. Economic indicators  for America and China  towards the end of 2020 were surprisingly strong.

But  the  pandemic is not  going quietly. More virulent strains of Covid-19 have  forced stricter lockdowns in parts of Europe.  Then the  logistics  of producing and rolling out  the vaccines are  proving  not as  simple  as many thought. The harm to the world economy is likely to be more prolonged than hoped .

So is there a  risk  of  a  big  crash? Some  market veterans believe so.

Jeremy Grantham, the British co-founder  of the US investment  firm GMO, gave  some of his fellow investors pause  when  he talked of  a “fully fledged epic bubble” .  He  described it as  featuring “extreme over-valuation, explosive  price increases,  frenzied  issuance  and hysterically speculative investor behaviour”.

Against that,  some  argue  that market valuations  are not quite so over-inflated. The S&P 500 is worth about 22 times predicted earnings for 2021, higher than the long-term average of  about 16, but  lower than the 30 before the dotcom bubble burst.

With  the NZ market  on the cusp of the half-year reporting season,  investors  will  be  able  to make  their own  assessments on   whether  the NZX50 index  will  continue  an inexorable march  north—or instead provide a  roller-coaster  ride  of the kind Meridian shareholders  have already been given this year, with the shares  hitting a  peak of 994c   and then falling  again  to  the low  700s.

Another  NZ  stock  which  has been  heavily traded is  Fisher  and Paykel  Healthcare,  largely because it has experienced  strong  demand for  its respiratory products.   Analysts  thought  demand for those products  would tail off, but in many parts of the world it has continued to be under pressure to supply  its devices  to hospitals.

Last  month it reported  because of  the elevated hospitalisation rates for COVID-19, its hospital hardware sales had continued to be very strong. Operating revenue for the nine months ended 31 December 2020 was up 73% in constant currency compared with the previous comparable period.

In the hospital product group, which includes products used in acute and chronic respiratory care and surgery, operating revenue grew 113% over the first nine months of the previous financial year. Hospital hardware grew 446% and hospital consumables grew 54%.

But with the significant uncertainties associated with the course of COVID-19, the effectiveness or adoption of preventative measures, the progress of vaccines and their outcomes and the impact on future hospitalisation rates,  the company said it had no basis on which to provide formal guidance to results for the full 2021 financial year.

The company currently expects revenue and net profit after tax for the 2021 financial year to be higher than implied by  previous assumptions.

That provided  a  puzzle  for analysts  and  some  modified  their  assessments on the basis  that F&P’s hardware  sales would slacken sharply  as Covid vaccination programmes took hold. Instead   Point of Order suggests that with new Covid  variants  driving  up  hospital admissions,  it is  likely sales  could track on their elevated level  for  some time yet.

For the  first half of  this  trading year, Fisher & Paykel reported an 86% lift in net profit to $225m from revenue up 59% at $910m.

If  it  turns  out  that demand  for  its respiratory  hospital products is  sustained for longer  F&P  could   be  making further  revisions to its  revenue,   underlining  its  importance  to the NZ economy and confirming  its place at the top of NZX listed capitalised companies

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