Beat foreign investors to it

After the Feltex debacle and the decline of Telecom's share price in recent months, it would be understandable if small investors just walked away from the nation's second favourite form of investing after property.

It takes people a long time to forgive a bad sharemarket story. New Zealanders in their 50s and 60s still talk with horror about the 1980s sharemarket crash, and some have never gone back.

"It takes a generation to recover," says Guy Elliffe, head of equities at AMP Capital Investor.

But for those still in the game, despite a slowing market producing lower earnings, there are still good chances of better-than-average returns with the right companies. Additionally, you could hit the jackpot if your company becomes involved in a takeover.

It is hard to predict which companies will be chased, but given the amount of cash in the market, there are likely to be more takeovers in the wake of the Gullivers and Waste Management deals. And it is only right that New Zealand investors should benefit from the international interest.

As Carmel Fisher, head of Fisher Funds puts it, "Ryman Healthcare, Pumpkin Patch, Mainfreight and Freightways - each of these companies would be wonderful investments for Australian or international investors. We don't want all of them to disappear, but if they are prepared to pay a big price for our assets, it seems silly that New Zealand investors are not buying them first."

So how do you pick your company? Overseas investors are looking for companies which are undervalued, and so should local investors. This is a rare commodity, says Elliffe, as most of the companies on the NZX are fully priced at the moment.

Elliffe says it is the less well-performing companies that are typically subject to takeover. He was not surprised when Gullivers Travel Group had a knock on the door a couple of months ago from Australian travel group S8.

"Gullivers looked very cheap, but the market had some concerns about the longer-term growth prospects of the company, which was why it was so cheap," he says.

The equities expert advises investors to look for companies that are under the radar screen.

Fletcher Building is another New Zealand company which seems undervalued, given its place in the market. Compared with the values of similar companies overseas, such as Boral, the building materials company in Australia, it seems underpriced, says Elliffe.

Casino owner SkyCity is, meanwhile, under close surveillance by Australian investors at the moment, according to market sources.

The company has good Australian exposure - it operates in Adelaide and Darwin - and holds some appeal to investors, say analysts.

"Every company is a target, some more than others. Who would have thought that Carter Holt Harvey would have been a takeover target," says one finance broker.

The qualities that make New Zealand companies attractive to international investors are the same ones that make them interesting to local investors: they have potential for growth. Large New Zealand companies have a good reputation abroad - they are often dominant players operating in a stable market.

"If it is a big company in New Zealand, it seems that it is a very strong one. It is usually very well managed," says Rob Bode, head of research at First NZ Capital.

Freightways is a good example of a successful duopoly which competes with NZ Post for courier business.

"When the economy slows, businesses don't stop couriering parcels," says Fisher.

"It is an excellent company and very well managed," adds Elliffe, "and relatively cheap, compared with what is on offer globally, like Toll or UPS."

Freightways and Ryman Healthcare are unique. They remain reasonably insensitive to the local economy because of the foothold they have in the market. Ryman answers a need from the ageing population and has an extensive property portfolio, which has good growth potential.

Other Fisher Fund companies, Pumpkin Patch and Mainfreight, have the advantage of not being so exposed to national markets, says Fisher.

"They have become quite resilient to slowdowns and cycles in New Zealand. A lot of investors think we won't invest in New Zealand, it's too small, but nothing could be further from the truth," she says.

In the next 12 months, market commentators predict more profit downgrades and say NZ company shares will continue to decline. That may be a good reason to hold off buying until next year, cautions Jeff Matthews, senior finance adviser at Spicers Wealth Management. Despite the slower market conditions, there will be some new flotations in the coming months to lure people back.

Pike River Coal is being spun off out of New Zealand Oil & Gas (NZOG) and is seeking to dual list here and in Australia, because it knows there will be strong interest across the Tasman. There have been two successful flotations in recent months: Rakon and Delegat's.

The vehicle-testing company VTNZ is to float a minority stake this year. Meanwhile, other flotations are being worked on, including one rumoured listing by catalogue retailer EziBuy.

These flotations may never happen if private international equity funds have their way. They are coming in and scooping up, preventing companies from coming on to the market, says Rob Bode. Hirepool was looking at listing in the future, but Australian private equity firm Next snapped up 80 per cent of the company instead.

As ever, New Zealand savers should not expect instant results from the NZ stock market - for the next period, many New Zealand companies will be delivering fairly negative results, and while this happens, investors are more likely to receive gains from equities overseas, for instance in Australia and America.

An important piece of legislation likely to bring some people back to investing in stocks and shares next year is the proposed tax changes to unit trusts, which will no longer be taxed from April.

"If I was about to start buying shares, I would use a managed fund," says Matthews, whose company Spicers Wealth Management uses wholesale fund manager Brook Asset Management.

The new legislation due to be introduced next April will mean people will not have to invest directly, as they have had to do, in order to avoid taxes other than those on dividends.

The beauty of going with a managed fund is that you have exposure to overseas markets, and the fund manager makes all the difficult decisions for you, says Matthews. And the returns in a boom market have been excellent. Some managed funds are giving returns of 40 per cent, which means 26.5 per cent net.

Invest now, he adds, as long as it is not for the short term.

"You have got to look at the underlying businesses", rather than trying to pick which company is going to get bought out, says Matthews.

Other markets, meanwhile, are attracting interest from more sophisticated private investors, and these include debt issues and derivatives.

"New Zealand investors are very well cared for with debt investments, almost to the detriment of the share market," says Fisher.

But she adds: "With a lot of this debt there is an element of risk, and people just don't realise it."

"You have really got to understand them. With derivatives we advise investors to be careful. People rarely understand exactly the finance contract [they] are entering into," says Elliffe.

Goldman Sachs JB Were launched a derivatives division earlier this year.

Head of retail John Cobb agrees that you have to be well informed. He describes derivatives as a way of managing your risk-enhanced portfolio.

Whichever market you decide to enter, don't do it lightly. Research the market fully, and choose a fund manager if you would rather leave it to the experts. Or you could try it on your own. Whichever way you do it, you have to be in to win, after all, and it's no good complaining about foreign buyers buying our companies. At least make them pay you something personally for it.