Money 2013: Stocks in trade

by Jonathan Underhill / 28 February, 2013
Equities still offer good returns after a stellar run.
Tim Bennett
Tim Bennett, photo/David White.

$450 million of funds will be looking for a home on March 28 and by all accounts it will be a long hard look. National Australia Bank has called in its BNZ Income Securities perpetual shares. The investors in these NZX-listed hybrid securities have been getting 9.89% annual interest since they were issued in early 2008.

Try getting that interest rate today in a world where central banks are printing money and keeping interest rates near zero, and benchmark bond rates such as 10-year US Treasuries have touched record lows in the past 12 months.

“Easy global monetary policy settings are unleashing a tsunami of cash that is pushing investors along the risk curve into higher-yielding and higher-risk investments,” says Shane Solly, portfolio manager at Mint Asset Management. “An outflow from bonds to equities is understandable and will continue underpinning equity market returns.”

The NZX 50 Index of the biggest companies on our sharemarket rose 24% last year, outpacing a 14% gain for US shares and 19% for Australian stocks. Brokers say part of that has been from overseas money looking for a good yield. The value of shares traded on the NZX in January jumped 68% from a year earlier to $2.3 billion. In December, the gain was 65%.

Demand for New Zealand shares has propelled the NZX 50 to five-year highs, meaning it is now at the giddy heights reached in 2007 before Lehman Brothers filed for bankruptcy protection, heralding the start of the global financial crisis.

That’s led to concern that the market is overheated and stocks are overvalued. New Zealand stocks may be a bit stretched – trading at an average of 15.6 times forecast earnings – but that’s not the only thing being looked at.

“People are talking about New Zealand shares being in a bubble and very expensive. I certainly don’t agree with that,” says Mark Lister, head of private wealth research at Craigs Investment Partners. “Stocks are being priced much more on a dividend-yield basis and on that basis they still look very attractive.”

Across the NZX 50, the dividend yield is about 5.8%. Money on a six-month term deposit is getting just 4%.

Lister was among those surprised by last year’s rally on the NZX. He’d expected gains of about 10%. Now he’s forecasting a total return from New Zealand shares of 7.5% in 2013, made up of a 2% capital return and a 5.5% gross dividend yield. Investors have become more realistic about earnings growth. Companies have lower debt levels and the economy isn’t about to go into recession, with annual economic growth of 2-2.5%.

Shane Solly
Shane Solly: the trend is a switch from bonds to shares. Photo/David White.

The 5.5% dividend-yield forecast makes New Zealand a standout. For Australia, his estimate is 4.4%, the US 2.5%, Europe 4.1% and emerging markets 2.7%. New Zealand also has the lowest market-risk rating of the group. Australia and emerging markets are considered moderate risk, with the US and Europe the highest risk.

Yet with risk comes reward. Total returns from stocks in emerging markets are forecast to be 10.7%, Europe could return 10.1%, the US 8.5% and Australia 8.4% – a result of the greater potential for capital gain.

In the US, the S&P 500 Index is also trading near five-year highs and a calm has settled on sharemarkets that some commentators have likened to a large slow-moving high on a weather map. The Chicago Board Options Exchange Market Volatility Index – better known as the global “fear index” – is at a five-year low.

Threats to global growth that preoccupied investors a year ago, such as a severe economic slowdown in China, have proven unfounded. Still, a fiscal stalemate in Washington remains on the cards and Europe’s debt problems could flare again.

The latest earnings season has revealed whether companies have performed as well as expected. Those that disappointed have been dealt with harshly. Investors sold their shares of manufacturers Nuplex Industries and Skellerup Holdings when these companies missed their targets and lowered their earnings expectations.

Contact Energy rallied after it met expectations for a profit gain in a tough electricity market. Fletcher Building dropped following disappointment over a lack of improvement in its Australian earnings. Ebos Group, which expanded from medical supplies into pet products a year ago, posted a 29% gain in first-half earnings thanks to its new business. Its shares recently rose to a record high.

New Zealanders are starting to take more notice of their sharemarket. NZX chief executive Tim Bennett says the exchange has seen a small increase in activity.

“Our sense is it’s not people new to the market; it’s people with brokerage accounts trading more,” he said.

“The interest-rate cycle has changed and bonds are maturing.”

However, a lot of New Zealanders have inadvertently returned to the sharemarket without realising it. Some two million are in KiwiSaver schemes that have accumulated $13 billion of funds, of which the amount in New Zealand shares is about $1.3 billion and rising as low interest rates discourage more conservative investments.

And they’ll get more opportunities to invest this year with new issues coming to market. Mighty River Power will be the colossus at an estimated $1.5 billion, assuming the Government can surmount legal challenges. Craigs’ Lister says there may be five more of a smaller scale. “That’s going to be quite an important theme this year.”

Money 2013

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