Time to pay more attention to companies' earnings risk

The market is paying too little attention to companies' earnings risks, AMP Capital says.

Head of New Zealand equities Guy Elliffe said yesterday that the country's biggest fund manager was struggling with two issues involving portfolios.

The first was working out the implications of mergers and acquisition activity.

Cash available following a raft of takeovers combined with dividend payments meant a demand for equities.

Elliffe believed Australian and global private equity players would continue to seek to be a suitor to some companies.

A possible transaction that stood out, just on the numbers, was between The Warehouse and Woolworths.

But he cautioned that he was not saying the transaction was likely.

The second issue was that AMP thought the market was "too sanguine" about earnings risk and valuations were relatively full.

"So we don't think there's a great fundamental case for the market, but we think there's a good demand-and-supply case."

The past quarter or so had seen a "huge disconnect" with a weakening of GDP growth but a big upward spike in earnings expectations.

That was a reaction to the fall in the dollar which offered strong support to earnings of export companies, such as GPG, Tenon and Fisher & Paykel Healthcare.

However, the domestic economy was holding up better than might have been expected.

- NZPA