12 Sep 2016

Investors told to be wary amid sharemarket boom

7:14 am on 12 September 2016

The sharemarket is booming, but investors are being warned not to take it for granted.

graph showing stockmarket up

People have been attracted to the sharemarket because they are not getting the returns in other areas such as term deposits, Shane Solly said. Graphic: 123RF

The benchmark NZX 50 has jumped nearly 20 percent this year, hitting a record high 7571 last week, driven by those chasing higher returns in a low interest rate environment.

"The New Zealand economy has been very robust, and New Zealand companies have actually delivered pretty strong, consistent earnings growth in a world where that's a rarity," Harbour Asset Management's portfolio manager Shane Solly said.

"Certainly people have been attracted to the market because they are not getting the returns from term deposits or bonds and so forth."

But the flood of cheap money looking for decent returns has pushed up prices.

Stock prices are currently more than 22 times earnings, compared with historic norms of about 15 to 16 times.

Mr Solly admits valuations are stretched.

"At the moment we will continue to see a moderate rate of earnings growth, companies doing the right things in terms of investing, so we're not seeing the precursors for a major pullback.

"But valuations are stretched and that's the one thing we would highlight. It would not be unreasonable to expect markets to pull back a little bit."

Mr Solly doesn't expect a major dip, arguing the local market has become more diversified and substantial in recent years.

Shareholders Association chair John Hawkins is also optimistic about the market's resilience, pointing out many companies have strong balance sheets, and continue to pay decent dividends.

However Mr Hawkins wanted to see more company listings on the sharemarket.

"A lack of liquidity in some shares and a lack of shares to invest in have always been a bit of a characteristic of the New Zealand market.

"But we don't want to see companies listing who are not good, sound propositions."

Candidates remain thin on the ground, with only the fish farming company, New Zealand King Salmon and the skincare products and treatment company, FAB Group, intending to float.

The Reserve Bank is also unworried about the equity market boom.

The global phenomena of low interest rates and printing money has sparked fears of asset price bubbles.

In New Zealand, surging house prices have prompted the central bank governor, Graeme Wheeler, to clamp down hard on property buyers in order to protect the health of the financial system.

However, inflated share prices are not viewed as a risk.

"The sharemarket is certainly going up in price. The one thing it doesn't have is leverage," the Reserve Bank assistant governor John McDermott said.

"So when we've seen high house prices people are borrowing money to buy that asset. When they go into

the sharemarket usually they are taking their cash. So it becomes less of a risk for the central bank."

Analysts including currency strategist Derek Rankin believe the risk of a sharemarket collapse lie outside New Zealand.

Mr Rankin warned the biggest danger could come from the actions of central banks globally to stimulate growth and inflation which, he said, did not appear to have worked.

"Sharemarkets are probably artificially high, bond markets are artificially low, currencies are being distorted. Negative interest rates are causing all sorts of distortions.

"When money is effectively free, the cost of property and housing and everything else goes through the roof and we're already seeing all those effects happening."

Mr Rankin feared central banks had done little except sow the seeds for the next crash.

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