Investors start to get that sinking feeling

Frank Aldridge

Amid signs that the economy may, in the words of Finance Minister Michael Cullen, "be about to enter heavier waters" some share brokers are advising their clients to, if not abandon ship, at least steer a course for friendly foreign shores for the coming year.

In its Investment Outlook published this month, First NZ Capital said a softer outlook for domestic equities combined with the likelihood of a substantial fall by the dollar in coming months made overseas investments an attractive proposition.

"We consider ourselves loyal Kiwis, but in assessing investment returns for 2006 we think overseas equities will deliver better returns than domestic equities," the firm said.

With the benchmark NZSX-50 index rising 8.8 per cent during 2005, First NZ said the sharemarket was one of the worst performing among developed countries for the year "and in 2006, as much as it hurts to say it, we expect another bottom quartile performance".

First NZ expected the high exchange rate, tighter monetary policy, a slowdown in the housing market, high fuel and energy costs and a further moderation in domestic spending to weigh on the market and the wider economy next year. "The headwinds facing our economy will make the going difficult for the equity market."

First NZ advised clients to "increase exposure to overseas equities and review domestic share portfolios and screen for those that may suffer from the more difficult economic times that lie ahead".

And with the consensus among currency strategists and economists that the kiwi will tumble next year, it said: "We think domestic investors should enjoy some currency translation benefits from their overseas equities later in 2006."

ABN Amro Craigs chief executive Frank Aldridge said while his firm still saw 2006 as being "reasonable" for the local market "we'd probably see a continued focus on allocating clients' money offshore to take into account the currency and that includes Australia".

But as well as increasing returns from offshore investments, a fall by the local currency should help the domestic market as well.

"If the currency does weaken over the course of next year some of the exporters across the board should benefit in the NZ market and we've got a number of those," said Aldridge.

ASB Securities managing director Tim Preston said most listed companies had sound balance sheets, but households would likely feel the pinch from a downturn and that would produce second round effects for the market.

People had enjoyed positive wealth effects from appreciating house prices in recent years. "People have felt wealthier, they've spent and leveraged up and you've had great security of employment and low inflation. It's been a nice virtuous circle.

"If you start to reverse some of those factors you also get negative wealth effects. People are going to be left hanging out there with in many cases a lot of debt, which they may not feel that comfortable about when they have to refinance it at much higher interest rates."

That would not be good for the sharemarket. "It just affects sentiment, the amount of cash and the investment behaviours of people.

"If there's a slowdown, companies will be affected. Valuations across the board will have to come off to reflect a less benign economic environment."

However, First NZ still saw investment opportunities in the local market, including market stalwart Telecom, CanWest MediaWorks, Mainfreight, Freightways, Guinness Peat and Nuplex.

Aldridge believed there were good prospects further down the board too. "There's always going to be small and mid cap stories in terms of new industries and new companies emerging through.

"Across the board there will be stocks that will be able to perform as markets go down. There's always outperformers and there's a few of those speculative stocks that may come to fruition as well."