Tiger Brokers: Breaking down stock splits – a ‘curious phenomenon’ in global markets
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Tiger Brokers is a global brokerage platform that gives Australian investors simple access to ASX and US stocks. Listed on the Nasdaq, the trading group’s Australian division is offering zero brokerage on both US stocks and ASX shares for the first 3 months.
Global stocks often outperform in April, and there’s been solid returns so far this month after markets staged an impressive rebound in March.
While the Russia-Ukraine war has played havoc with commodity markets, it’s also contributed to the complex inflation outlook that investors continue to grapple with as the world emerges from the pandemic.
During March, US interest rates rose for the first time since 2018. But for the most part, stocks are doing a good job of withstanding the prospect of tighter monetary policy.
And that’s partly a by-product of the link between inflation and underlying economic health, which in turn affects company fundamentals, said Michael McCarthy, Tiger Brokers’ Chief Strategy Officer.
“Strong growth rates in the broader economy are good news for company bottom lines,” McCarthy says.
“This is why most historical studies show that stock markets rise for the first part of an interest rate lifting cycle, and this honeymoon phase can last for up to two years,” once rates start rising.
So while financial conditions have started to tighten, it doesn’t mean good companies can’t still outperform.
However, while higher rates doesn’t necessarily mean ‘sell everything’, the investment landscape may also grow more complex now policy makers have a job on their hands to contain inflation.
“Investors should expect that at some stage the effects of higher interest rates will bite and that share markets are increasingly vulnerable to correction, as central banks tighten monetary conditions,” McCarthy said.
But for now, the “buy the dip” mentality “is still deeply ingrained by investors’ success since the 2009 global low for shares”, he added.
“Share investors appear focused on the positives of economic recovery, meaning further gains over 2022 are likely.”
Looking further out ahead, McCarthy said investors should still be wary of the impact on valuations of high-growth tech stocks caused by sustainably higher interest rates.
“If growth forecasts are pulled back, the impact on valuations for this group is highly significant,” he said.
“The next bear market in stocks depends on the behaviour of newer individual investors.”
“This could mean that the two to five year outlook is for a long, slow tumble that resembles a balloon deflating, rather than popping,” McCarthy said.
Elsewhere in global markets last week, Tesla stole the headlines (again) with news it was planning another stock split, following a separate 5-for-1 split in 2020.
Ostensibly, stock splits don’t change anything about a company’s fundamentals. But McCarthy said they still represent a “curious phenomenon” in markets.
“The mathematics is ironclad. Buying 1,000 shares at $100 is exactly the same as buying as buying 2,000 at $50,” he said.
“However, it’s arguable that there is a psychological effect. Some investors may perceive there is somehow less risk in buying a share at $50 rather than $100, although this is factually incorrect.”
But that hasn’t stopped share splits being “big news” lately, McCarthy said, particularly in the US.
“Hard-headed professional investors may argue that the gains seen in many recently split stocks are attributable to the biggest bull market seen in modern times, rather than the splits themselves,” McCarthy said.