Running with the bulls
Experts debate how long before the NZX runs out of puff
Back in early August, Bernard Doyle, the respected strategist at broking house JBWere, issued a blunt prognosis about the New Zealand economy. Entitled ‘‘Working harder, not smarter’’, Doyle’s missive saw him discussed during televised election debates, after he pointed out that New Zealand’s productivity had gone backwards since 2012.
Essentially, Kiwi workers were producing less per hour than they did five years ago, Doyle argued.
But the real point of the note was not to enter the political fray. Doyle declared that after a remarkable rise, New Zealand’s sharemarket was now one of the most expensive in the world.
All this at a time when our economy was being held up by booming immigration and inflated asset prices.
Irrespective of any risk from the election, Doyle urged JBWere’s clients to cut the size of their investment in New Zealand shares by a quarter.
JBWere is not alone in expressing reservations about the values on the New Zealand sharemarket.
Forsyth Barr, which has 20 offices, has also been urging clients to consider selling shares in New Zealand and investing offshore.
But so far, the market as a whole is not listening.
Day after day, the NZX-50, a group of the largest local companies on the New Zealand stock exchange, has crept higher and higher.
From the base that Doyle warned about, shares have gained around 3 per cent in two months.
On Monday, at 12:11pm, the index hit 8000 for the first time, and it is up 16 per cent so far this year.
This at a time when the Auckland housing market has been cooling for almost a year, there are signs consumers are closing their wallets and economists generally predict overall growth will slow.
Incredibly, the gains of 2017 are not especially remarkable based on recent history. Aside from a 9 per cent rise in 2016, the NZX-50 has been risen between 13.5 per cent and 24 per cent every year since 2012.
Almost completely unheralded by the general public, and in gains which have largely bypassed most Kiwis, New Zealand is in the middle of a remarkable bull run.
But the NZX-50 is far from alone. On New York’s Wall Street, the S&P-500 is far above the highs seen in 2007, when a bonanza of lending gave way to the global financial crisis.
Even in London, which risks an exodus of financial services when Britain exits the European Union, both the FTSE-100 and the FTSE250 are at all time highs. Markets in Germany, France, Canada all hit fresh record highs this year.
While Australia was almost alone among Western nations in avoiding a recession a decade ago, the ASX-200 is unexpectedly muted, more than 10 per cent below where it was in 2007.
Historically, success on the NZX has been tilted towards companies which pay so-called strong ‘‘defensive’’dividends, especially investments, such as electricity companies or infrastructure.
Shares might not double in value overnight, but even in a worst case scenario should retain significant value, while offering steady income.
This local is welcomed both by investors as well as international funds, which may be parking money here partly as a bet on New Zealand dollar.
Doyle says internationally, New Zealand is something like ‘a cross between a share and a bond'.
With interest rates at close to record lows worldwide, conditions are ripe for markets like New Zealand’s to boom.
But even now, with the NZX-50 doubling since May 2012, dividend returns in a range of household names are still better than going to the bank.
‘‘If Mum and Dad have got $20,000 and are wondering what to do with it, you can go down to the bank, you might get 4 per cent,’’ Neil Paviour-Smith, managing director of Forsyth Barr says.
Instead, the same couple could buy Auckland Airport, Meridian Energy or Port of Tauranga, where dividend yields were all more than 5 per cent.
Sure, the share price might drop, but if you can hold on and back the company to pay those dividends, the returns will be greater, he says.
While New Zealand’s large portion of less risky companies and comparatively strong economic growth justified the strong run, Paviour-Smith says clients are being advised to consider selling shares locally and look elsewhere, because New Zealand is pricey.
‘‘From a fundamental value point of view, our research guys are somewhat wary, and have been for some time.’’
However, global enthusiasm for New Zealand could also leave markets vulnerable.
Forsyth Barr estimates foreign ownership of the NZX-50 has climbed from less than 30 per cent in early 2012, to around 50 per cent now, the highest level in decades.
Foreign money is fickle, and could leave in a hurry if interest rates rise, or another market looks better.
Paviour-Smith says some global fund managers see New Zealand and Australia as effectively the same place. A turnaround across the Tasman could lead to investors ‘‘switching’’ bets.
‘‘The big risk is probably less around New Zealand losing its allure, and probably more about Australia looking better than us.’’
The flow of foreign money highlights how much of the gain in the sharemarket has been driven by offshore factors.
Combined with extreme conservatism in many KiwiSaver schemes, many Kiwis will have almost entirely missed out.
In just over five years, offshore ownership of New Zealand shares has risen from a little over $10b, to more than $40b.
While that is now on a par with Kiwisaver, only around 10 per cent of KiwiSaver funds are invested in New Zealand shares.
‘‘You just haven’t seen as much money flowing into the market as you might have expected from KiwiSaver,’’ Paviour-Smith says, with money tending to fall into ‘‘boring default schemes’’ which favour safety over higher longterm returns.
If Paviour-Smith laments the way KiwiSaver is allocated, Sam Stubbs, the former boss of Tower who heads KiwiSaver startup Simplicity, is rabid on the topic.
While he accepts that when KiwiSaver was established it was politically prudent to value safety, the consequence was that younger New Zealanders were missing out on far more attractive returns.
‘‘The consequence of that is that billions have been lost. There’s a massive opportunity cost and that will carry on unless the default providers step in and educate,’’ Stubbs says, calling for pressure to be put on to force the default providers to ensure customers are making informed choices.
‘‘The default providers have been delivered a printing press for these people, their money. There is a moral obligation to educate them and get them into the right fund.’’
Stubbs has adopted an extremely simple model since founding Simplicity. He points to research he says proves that over a long time period, very few investment managers beat the market as a whole. The company simply buys index funds, then holds.
‘‘The biggest mistake is to not be invested in markets.’’
The strategy might explain why Stubbs insists he has no idea if the market is near its peak.
Instead, low interest rates could be around for a long time, due to technology making the cost of doing business fundamentally lower.
‘‘We could have had this conversation three years ago. We would have said this is a raging bull market. Could we be wrong for the next 10 years? We might.’’
Stubbs claims the history of capitalism has been marked by multi-decade periods where technology, from shipping to the telegraph, have made the cost of doing business fundamentally cheaper, keeping interest rates low and asset prices high.
Now could easily be the start of such a period.
‘‘Three years ago when we set up Simplicity, the cost of setting up the customer database infrastructure would have been north of $750,000 a year. Now you can do it for $1200 a month through Amazon. This disinflationary power of technology is incredible, and we’re only just beginning to see it.’’
Key to the argument that the sharemarket is not in a bubble seems to be that the rise has been far from indiscriminate in 2017.
Shares in Auckland International Airport, a natural monopoly gaining from record international tourists, have fallen almost 5 per cent over the past 12 months.
Fletcher Building, for a time New Zealand’s largest listed company, is down 20 per cent, while other construction companies have also suffered.
Instead, some of the biggest gains have come from companies paying little or no dividends, but promising strong overseas growth potential.
Greg Fleming, head of investment strategy at AMP Capital, said 2017 might turn out to be the year fund managers began to respect large growth opportunities.
‘‘In the past you had a very high burden of proof before a New Zealand growth stock got substantial investment.’’
This year three of the best performers have been dairy exporters A2 and Synlait and software firm Xero.
Fisher & Paykel Healthcare, a growth company with a dividend yield of 2 per cent, has risen 33 per cent in the last year, becoming the most valuable listed company in New Zealand on Wednesday.
Craigs Investment Partners head of private wealth research Mark Lister said a few major gains were flattering the performance of the rest of the market.
‘‘Some of the superstar highflyers have had a disproportionate impact and if you put them to one side, the market has just been chugging along steadily.’’
Nevertheless, the market certainly is not cheap, Lister said, and there were risks ranging from a slowdown in China to ‘‘fickle’’ offshore investors.
‘‘When you’re a small market, a lot of people trying to get in or get out can exacerbate the ups and the downs.’’
Is behaviour becoming riskier, as the long upward run in asset prices rolls on?
While most of Craigs clients ‘‘have been through a cycle or two,’’ Lister said the picture he was picking up anecdotally was that the wider investment scene was becoming more aggressive.
‘‘People are definitely taking more risk than I think is sensible, which I think is just a function of the fact that we’ve had a really strong economy for a good six or seven years now.
‘‘Housing markets have only been going one way, share prices have only been going one way, interest rates have been very low.
‘‘It’s human nature, whenever you’re at this stage of the cycle, and everything’s been going pretty well.
‘‘People start getting a little bit complacent, thinking that the good times will last forever.’’
While this was seen most in real estate, Lister said low interest rates had pushed some money from effectively risk-free investments such as term deposits, towards, for example, shares in property companies, which can pay strong dividends in a healthy economy, but can sink when the market turns.
‘‘We’ll see a correction or a recession. That’s inevitable. I can’t tell you if it’ll happen in the next one year or five years, but it will happen some time, and when it does there will definitely be people who get a big shock,’’ Lister said.
‘‘Billions have been lost. There’s a massive opportunity cost and that will carry on unless the default providers step in and educate.’’
Sam Stubbs, Simplicity