US money makers keep eye on kiwi

By Adam Gifford

Between the lines


Rarely does New Zealand hit the radar screens of US investors.

Yet of late some have noticed that it's poised for a classic economic turnaround. They are hoping for quick, medium-term gains on both equities and the currency despite the uncertainties of the upcoming election.

Investment bank Salomon Smith Barney has made New Zealand its top pick in November for global asset allocation out of 22 developed countries, beating Ireland, Norway, Singapore and Denmark and leaving the US in last position. The rating is based on five criteria - valuation, growth, risk, interest rate and momentum.

New Zealand comes second in valuation, essentially because the average listed company has been knocked down so far in price when compared with its book value. The average developed country has a price to book ratio of 3.2 times, whereas New Zealand's is around 1.7.

"Close to 70 per cent of New Zealand company earnings estimates were revised upwards in October," Salomon notes.

Interest rates are another area to score high. New Zealand comes in third, because short-term rates have been declining when compared with the average of the past two years.

Overall, Salomon says that international investors should have 2.2 per cent of their funds in New Zealand - 22 times the nation's 0.1 per cent benchmark weighting in the Morgan Stanley Capital International index.

Citibank has chimed in with an upbeat report on the kiwi dollar. "Signs of economic revival ... monetary policy tightening and the extreme weakness of the currency has rekindled our interest."

It is urging clients to take a long position in the dollar in comparison to their holdings of yen. It also says that it should do well against the Australian dollar, but is not advising people to sell US dollars because it believes that currency will also rise against the yen. It is a view that the bank says will hold for up to three months, and has been taken despite the uncertainty of the election.

Both of these analyses are based on technical factors, meaning that they do not directly assess political risk. But Salomon and Citibank note that any concerns about the election should have been built into pricing when they made their assessments.

New York bankers that trade the kiwi generally agree with the assessments, noting that economic growth is picking up and that the budget position is strengthening. They seem reluctant, however, to see their clients trade ahead of the election.

One banker said that if a Labour-led coalition won, the kiwi could weaken because that was the party's stated position.

He said that there could also be a tendency to open the Government purse-strings. Once the event is over, however, the banker said that the dollar should gain from where it is now.