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Bouncing from one bubble to another

By Chris Hutching

Friday 7th March 2003

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Guardian Trust Funds Management managing director Anthony Quirk yesterday warned investors against acting to quickly to ditch their poorly performing international shares in favour of bonds.

The temptation has become stronger after a repeat performance during February when share performance was weak and bonds were stronger.

For example, the New Zealand bond index was up 1.3% for the month while the New Zealand sharemarket was down more than 4%.

Even so, over the past month New Zealand bond rates have fallen to levels close to their lowest in the past 15 years. The rally in US bond yields has been even more marked, with bond rates at 40-year lows.

But Mr Quirk warned in the rush to exit equity markets and find more stable returns, investors could be fuelling a speculative bubble in bonds. Any recovery in global economies and markets or a positive outcome to the Iraqi conflict could see a significant lift in bond yields.

This would result in lower than expected returns from the bond sector over the next few years and even losses, prompting some retail investors to go to cash in the bank or to residential property, helping drive cash rates lower and boosting property prices.

The answer to the conundrum: remain diversified.

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