KEY POINTS:
The market is at its most expensive since 1987 and investors should expect much lower share returns this year, says the country's largest managed fund.
And AMP Capital Investors investment strategy chief Leo Krippner said investors should not take "stellar" returns for granted.
While AMP had forecast local shares would do it tough late last year "it turns out they beat international shares hands down".
"One of the reasons for that was we had strong merger and acquisition activity."
The firm's New Zealand equities investments put in "a raging performance", returning 13.7 per cent over the December quarter and 36 per cent for the year.
AMP forecast a 10 per cent annual return from such investments this year.
One reason for the more modest outlook was AMP's forecast the economy would grow 2 per cent against 3 per cent for the rest of the world.
Also, the market is now very expensive.
The sharemarket is trading at an overall price-to-earnings (p/e) ratio of 17 times. "Basically, it's at a post-1987 peak.
"It shows investors are paying a lot for the earnings in New Zealand companies at the moment.
"The strong run we have had over the last quarter has taken it into territory that does look like it might be a little bit stretched."
Paul Richardson of BT Funds Management agreed, saying a recent survey of local fund managers showed most believed the market was expensive and expected lower returns.
First NZ Capital research manager Barry Lindsay said his firm also agreed with AMP's analysis: "This is no longer a cheap equity market and better opportunities for new investment dollars may lie elsewhere.
"The world market, excluding Japan, is trading at a p/e of 14.5. It raises questions as to why New Zealand is trading on average at a premium in p/e terms to the rest of the world."
