Global upturn could knock NZ market

An improving global economy could take the heat out of New Zealand’s equity market, it has been suggested.

Thursday, May 14th 2015, 6:00AM

by Susan Edmunds

The NZX50 was up 17.5%, including dividends, over 2014, up from 17% in 2013 and 24% in 2012.

Foreign money is behind much of the strength. Historically, foreign investors would make up 35% of the New Zealand market. They now represent 45%.

Stephen Bennie, of Castle Point, said: “A lot of the buying has been by offshore investors, they’ve been coming here seeking yield and New Zealand has been a real beneficiary of that. There are lots of mature businesses with good earnings and high payouts and they’ve been sought after. As a group, New Zealand companies are trading at nearly 20 times next year’s earnings, when typically they’ve be around 12.”

The foreign investment is concentrated in larger cap stocks such as Auckland Airport, Meridian and Xero.

But Forsyth Barr investment analyst Brian Stewart is warning that the heavy influence of international money means any improvement in global economies could knock NZ equity prices and those large caps in particular.

He said, should foreign ownership fall to its 10-year average, about $6 billion would flow out of the market. “The higher foreign ownership goes, the higher the risk posed by a change in relative attractiveness.”

He said rising global interest rates could affect companies whose prices were supported by yield. “They stay up while interest rates stay low… we’ve had a bounce in global interest rates over the last month. They’re still very low but they’ve gone up from the extreme lows. At some point, yields may be good enough in the bond markets to see some of that money migrate out of defensive stocks and into the bond market.”

The 2015 New Zealand market was much better and more diverse than it had been 20 years ago, Stewart said, so there were sound reasons for more foreign investment. “But realistically, if the opportunity is better elsewhere, the money moves.”

Stewart said increasing KiwiSaver inflows would not make up for the loss of international money. Even if 100% of Australasian equity inflows came to New Zealand equities, that would only represent $500 million in the current year, well short of what could be lost.

Tags: equities