Several newcomers to the marketplace dominate the losing list on Tuesday. Interest rate jumps are hurting equities that lack earnings, according to equity experts.
Several shares on the unregulated Euronext Growth market fell sharply on Tuesday morning.
Among the 50 companies with the largest decline, half are companies from Euronext Growth.
Among the biggest losers with a decline of over ten percent, we find stocks such as Cambi, Horizon Energy, Teco 2030, Zaptec and Agilyx.
Several companies are also falling sharply on the Oslo Stock Exchange, including the hydrogen company Nel and the solar companies Rec Silicon and Scatec. This weighs on the main index, which is down 0.6 per cent.
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Believes interest rate rise gives stock crack
Equity strategist Paul Harper in DNB Markets points to a “fairly sharp” rise in the so-called real interest rate in the US, ie the interest rate after deducting inflation.
He believes the rise in interest rates will hurt stocks that have low or no earnings today, but where there are expectations of high earnings in the future. The reason is that future earnings will be less valuable today when interest rates are higher.
– Growth stocks are much more sensitive to interest rate assumptions than value stocks. The type of shares where earnings come far in the future and where the multiples are high today will have the biggest negative effect of the interest rate rising, he says to E24.
The real interest rate has been below zero, but has risen from minus 1.08 percent to minus 0.79 percent since February 11, according to Harper.
– There is a relatively large change in interest rates during that time period. When interest rates are low, even small changes become quite significant.
On Monday, hedge fund manager Marius Borthen of Blueberry Capital stated that he considered several of the shares on Euronext Growth to be vulnerable to a significant fall in the price.
Among the reasons highlighted were high pricing and variable liquidity in equities, combined with a weaker outlook for growth equities as a result of the rise in long-term US government interest rates.
He is accompanied by chief strategist Christian Lie at Danske Bank. He points to great optimism and that many investors have had a lot of money in, among other things, the technology giants and renewable energy.
– With as much optimism and extreme demand for shares as we have seen in recent weeks, it must be assumed that a good part of this money is more volatile, especially from private investors. They are not as long-term as they might be.
– When optimism has been so overwhelming, everyone should have shares and many take more risk, the sensitivity to disappointments also increases, he says.
Lie says he does not see the decline as the start of something very serious.
– There has been very high pricing of companies, especially those that do not make that much money, and when interest rates rise, it leads to a repricing of some of these companies.
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Harper also points out that large companies that make a profit, such as Telenor and Equinor, rise on Tuesday.
– The large established companies that make money today are doing well. Those who are priced for strong growth and earnings some time in the future are the ones who fall a lot.
The development is not isolated to the Norwegian market, Harper points out.
– We have seen the same trend internationally as well. It is not a Euronext Growth phenomenon.
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– Dramatic in one day
Nordea’s Investment Director Robert Næss has been an outspoken skeptic of the high pricing of many new entrants that have been listed on the marketplace.
He estimates that the market value of all Euronext Growth companies will fall by around six percent on Tuesday morning.
– It’s dramatic in one day. But if you look at the month so far in February, it is down only one percent. In that sense, it is not dramatic.
– Is this a buying opportunity?
– Not for me. Then you should put a zero behind that fall, says Næss.
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Seeing “more downside”
He reckons that the Euronext Growth companies will be traded at a share price that is around 285 times higher than the companies’ earnings, against a ratio of 18 on the Oslo Stock Exchange.
The number tells whether the valuation is high or low.
– If you look at it objectively, you should expect large fluctuations when things are priced in this way, says Næss.
– Because you price in something that might happen, in many years. You have the time effect, the uncertainty in the business model.
He thinks there are too many expectations baked into the courses.
– In the future, you will see more downside than upside, says Næss.
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