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Portfolio Talk: Wayne Stechman

Tower Asset Management portfolio manager Wayne Stechman gives his views on the market, and names some of his favoured stocks.

Monday, October 19th 1998, 12:00AM

by Philip Macalister

Tower Asset Management portfolio manager Wayne Stechman is an avid sports fan and has, when he was younger, achieved representative status in table tennis. As manager of the Tower New Zealand Equity Fund he has built up a reputation for being able to sniff out a good bargain in the market. That ability has seen the $23 million fund he manages consistently well placed in the performance tables.

However, when it comes to picking winners in the sports field he has to admit that being a Canterburian "he's always got a patch on one eye."

Waikato destroyed his latest pick, that Canterbury were going to win the National Provincial rugby championship, in the semi-finals recently.

Stechman's passion for sport is equalled by his passion for the equity market. Currently he has the distinction of holding the longest tenure of any New Zealand equity manager at any one institution (He has been with Tower for 10 years now).

What's the state of the New Zealand market at present?
On lots of traditional measures it looks like good value. If it wasn't for the global environment we would be near that sweet spot where everything is favouring equities.

On valuation grounds, the market is looking cheap. The gap between New Zealand price/earnings, cash flow multiples, and dividend yields, and the rest of the world has widened to historically high levels. New Zealand is a stand out on dividend yield. Our yield gap model based on earnings yield less bond yield shows equities extremely cheap against bonds.

Even the economic environment is looking more favourable. Monetary policy is starting to get really loose, (there's been a huge fall off in interest rates); there's oodles and oodles of spare capacity in the economy; and the corporate sector has a strong balance sheet. Business and consumer confidence looks to have bottomed.

So what's holding it back?
The problem is what's going on globally. Things look good and lots of people say it is just like 1991/1992 and the market will rise quickly next year. However in 1991/92 the global economy was rising, while now it's an argument of how much it is slowing down. Asia is in all sorts of trouble and equity risk premiums are getting wider.

It's always hard to categorise the state of the market. The consensus view is that the global economy can grow a couple of percent a year, but that seems a bit high to me.

What are some of the themes you are running at present?
It's hard here (in New Zealand) to follow themes because of the way the market is structured. It's easier to say which sectors we're not in. We are short in forest companies despite them having underperforming as much as they have. Electricity is another sector we don't have any real exposure. Ditto ports and transport.

Although finding successful themes is important, it is equally important to look at stocks from the bottom up and find value. Often investors get carried away with themes to the extent that share prices diverge from fair value (in both directions). For active stockpickers this is often where bargains are found.

What stocks do you like?
The Warehouse is probably our most preferred company of the bigger names. Their results have been stunning (against a backdrop of poor retailing conditions). They continue to expand the number and size of their sites as well as their product range and they dominate the areas they operate in. I like the financial services sector. Colonial looks like the best value, a whole lot better than AMP whose prices is still a function of supply and demand. It's the old shortage of script story which is driving the price.

Other stocks I like are Baycorp and Waste Management.

How do New Zealand equities sit in your asset allocation at present?
In our balanced funds, our position is still pretty defensive. They are more in favour of bonds than equities, and I don't see that changing soon.

Global equities are still a bit overvalued and we, in a relative sense, favour New Zealand over international equities. Our position is neutral to New Zealand and reasonably significantly underweight in global equities.

So, where are we at?
You'd have to say we are somewhere near the bottom, unless you believe in a global catastrophe.

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