Sniff of good times ahead leads to avalanche of cash

At a time when the economy is supposed to be at a standstill, the sharemarket hit its 11th consecutive closing high yesterday.

It has been powered by a glut of cash linked to recent takeover activity, robust overseas markets, the tumbling kiwi dollar and the sniff of better times ahead.

"What's happening in the economy has been pushed pretty much on the backburner," said ASB Securities managing director Tim Preston. "The market's being driven by a number of other factors."

First up, money from corporate activity such as the Carter Holt Harvey and Capital Properties takeovers had been hitting the market.

"Generally, there's a lot of cash around and, when the market starts performing, it does start feeding on itself," said Preston.

First NZ Capital research manager Barry Lindsay said money freed up by the takeover activity was returning to a market that had been shrinking through delistings and capital management or share buybacks.

He said another major factor driving the market higher was the fall in the currency, which had "definitely improved the outlook for the economy and, therefore, the sharemarket".

The lower currency was not going to give instant gratification, and the export sector would not reap the benefits until next year, "but equity market investors are forward looking".

"What is an expensive market on 2006 earnings is not as expensive on 2007 expected earnings, assuming an improvement in the economy helped by the significant fall in the exchange rate," Lindsay said.

Earlier this week, NZX markets head Geoff Brown attributed some of the market's recent vigour to signs that some of the cash that had been invested overseas to take advantage of the kiwi's expected fall was now coming back.

However, Lindsay was not so sure: "The general view is that the currency correction is only partially completed. In other words, there's more to come."

Investors who had invested overseas would probably continue to keep their money overseas until the kiwi fell further.

Preston said the fall in the currency made local assets a lot more affordable "and Australian corporates have plenty of cash slopping around and seem to be hungry for acquisitions. I would suspect a lot of companies listed and unlisted are having the ruler run over them.

"There's a lot of conjecture about which companies could be next and investors speculating on those as well."

Meanwhile, Lindsay said the market was now looking expensive.

"When you come to price it on forward earnings, over the next 12 months, its price to earnings [PE] ratio is about 16 times putting it at a premium to overseas markets.

"That, in itself, is unusual in that we have in the past traded at a discount to the world average PE multiple."

That was because the local market's growth prospects were generally seen as below the rest of the world.

While he saw little chance that the market could continue to grow at its present rate, the sheer weight of money evident at present was likely to prevent a correction in the near term.

"The other thing is the sentiment for equities globally is highly favourable.

"We're not swimming against the tide, we're moving with it. That doesn't look like it's going to end any time soon."

Preston said the present set of drivers meant the market was in uncharted territory, but it would eventually return to trading on economic fundamentals.

"But it's just a matter of how long this weight of money, speculation and corporate activity goes for. If our assets remain cheap here, and you've got offshore corporates on the prowl, it could last a long time."