Dream run for shares despite shocks

The NZX building in Wellington. Photo / Mark Mitchell

Earthquakes, a rapidly deteriorating budget, low growth, and now a government bailout of a major insurance company. Add to that the prospect of a credit rating downgrade for the country's sovereign debt and the picture does not look pretty.

These events combined should perhaps make for a dismal economic outlook but someone, it seems, has forgotten to tell the sharemarket, which is trading at its highest point since June 2008.

At yesterday's close, the main index, the NZX-50, was at 3445.28, up almost 4 per cent since the start of the year but still some distance from its all-time record high of 4333.25, set on May 24, 2007. The index hit 2417.95 during the depths of the global financial crisis in March 2009.

Fund managers don't seem too surprised at the market's resilience, because in many respects things have been looking up for New Zealand for a while.

Matthew Goodson, a portfolio manager at BT Funds Management, said the Reserve Bank's 50-basis-point cut in its official rate on March 10 (to 2.5 per cent) had been supportive for the market, because it forced high-yield-seeking investors out of fixed-interest investments and into the high-dividend-yield stocks.

The second major plus was the extremely favourable terms of trade, which are at their highest level in 37 years.

New Zealand's export commodity prices hit new highs last month, raising the prospect of a substantial boost to the wider economy. The ANZ Commodity Price Index jumped 4.7 per cent in world price terms, to be 29.6 per cent up on a year ago.

For the first time in many years, prices for the key exports - beef, lamb, wool and milk - are substantially higher despite a strong local currency.

"While the rise in oil prices and petrol prices is certainly a headwind, parts of our economy are still doing very well," Goodson said.

"Obviously there have been some terrible shocks, but there is some positive background out there," he said.

"The other thing is that the equity market is forward looking and if you look to some economists' forecasts for economic growth for next year, there are some quite high numbers, particularly as the Christchurch rebuild effect starts to kick in."

A fair bit of the market's resilience can be put down to New Zealand's biggest listed company, Fletcher Building, which has a 14 per cent weighting in the NZX-50, and a stock that has rallied by 30.7 per cent since August last year.

Expectations are high that Fletcher Building will benefit from the rebuilding of Christchurch, and the market has so far viewed its $1.3 billion takeover of Australia's Crane Group favourably.

"The initial view is positive towards Crane, but I think perhaps what is more important for Fletcher Building is that people are starting to look through the cycle a bit, hoping that the residential building cycle will not get any worse. Obviously the Christchurch rebuild could be materially positive for them."

Guy Elliffe, head of equities at AMP Capital Investors, said the market had regarded the September and February earthquakes as short-term negatives and had instead focused on market trends overseas.

"The market has been more encouraged by more positive trends globally, so we have not been overly surprised by the market's behaviour," Elliffe said. "Over the quarter we performed in line with the market global indices. The earthquake would not have caused a major disconnect with that relationship."

Elliffe said both the US and Australian sharemarkets had performed strongly, and the local market's gains were in part a response to that.

But the biggest negatives were oil prices and high food prices.

"We have been concerned about the domestic consumption outlook, especially on the retail front, so I think there is a bit of incremental negative news there with the oil price going through US$110 a barrel last night.

"If the oil price went higher it would clearly be challenging."

Rickey Ward at Tyndall Investment Management said there was a flight-to-quality element to the local market.

"It is not an unsafe place to do business and many companies provide good income streams."

The market generally tended to not get the big big falls, and nor did it tend to get big rallies, "but you do get a good, steady, incremental, grinding market, which is what we have had".

Ward said a large portion of big cap stocks were owned by foreign investors and the investment flows in those stocks were determined by market conditions in Australia.

"The market has had a big rally, and it is certainly not as undervalued as it once was."

He said some analysts now suggested the market is fairly valued to slightly overvalued.