High tide - sectoral leadership changing

The New Zealand equity market valuation remains stretched and the market is showing signs of rotation. In a world where the risk free rate is around zero for cash and money is being printed at such a fast pace it is difficult to discuss absolute valuations.  The NZ market is expensive in aggregate. Valuations for yield based stocks are expensive as investors react to low (and negative) interest rates. While interest rates may increase from current ‘Zero Interest Rates in Perpetuity (ZIRP)’ policy influenced levels we expect the increase to be measured given global structural change (for example changing pace of Chinese activity, Middle Eastern geopolitical instability and aging western demographics) that may restrain inflation and growth.

Most capital markets remain in a ‘bad economic news is good capital markets’ frame of mind. We saw this with the recent US employment data which was lower than expected. The US equity market responded with a stronger performance as the market moved to delay rate rises.  The significant flow of capital that has been triggered by global monetary policy easing has increased the pricing of defensive assets, including those equity sectors that provide high earnings certainty. We think current valuations leave limited room for disappointment. 

So what should investors do?

They could do nothing. Patience and earnings growth can reward investors. However, history suggests that the starting point matters. At a Price Earnings multiple tipping close to 18 times the NZ market is expensive.