Overheating?
The sharemarket looks overvalued as investors fail to price in uncertainty from the new Government’s policies and rising costs, say brokers Forsyth Barr.
The brokerage, in a review of the March year, said that company earnings prospects looked more subdued over the next few years after the last three years of strong growth.
The sharemarket hit another record on Friday, rounding out the week with a 3.5 per cent gain. On the day, the S&P/NZX 50 Index gained 0.4 per cent, or 38.93 points, to 8938.45.
Of the stocks with March 31 balance dates, seven reported results ahead of Forsyth Barr’s earnings-per-share expectations, six were in line and six came in below.
But in terms of earnings outlooks, the broker said: “In response to the minimal changes to forecasts over the reporting season, the 2.6 per cent rally in the New Zealand share market [in May] seems difficult to justify.”
Rob Mercer, Forsyth Barr’s head of private wealth research, said, “We have come from an environment over the last three years where earnings growth has lifted by about 8 per cent per annum, and we are now facing earnings growth of 4 to 5 per cent per annum.
“We are seeing some cost pressures creeping in, and that’s true globally as well.”
Mercer felt that uncertainty arising from the effects of the new Government’s policies and rising costs were not being priced into the market.
He also doubted the market was pricing in the likely effects of rapid changes in technology, and the positive and negative effects which that could have on corporate earnings.
“We are heading into a low earnings outlook where there is more uncertainty — the market is not pricing either one of those things,” he said.
The market was overpaying, given that uncertainty.
“The market is definitely overvalued,” Mercer said. “It could be fairly valued but it’s not obvious that the market is taking into account the earnings risk from rising costs, and it’s definitely not pricing in the fact that we are heading into a period of lower earnings growth than we have historically,” he said.
“So, intuitively, it’s looking like the market is overpaying for both the level of growth that we expect and the level of uncertainty on companies’ profitability from all the policy changes that are under way and the macros of the technology impacts globally that are cutting into outcomes pretty rapidly.”
In its earnings review, Forsyth Barr said that in terms of share price reactions, the market appeared to be satisfied with the results season.
Companies that had the most notable positive price reaction included Metro Performance Glass, Mainfreight, Argosy Property and Infratil.
Conversely, the market registered its displeasure with Pacific Edge, Evolve Education, Tower, Sanford and Arvida.
Revenue growth surprised on the positive side but those gains had been given back in higher costs, Forsyth Barr said.