by Susan Edmunds
New Zealand’s equity market has a price-to-earnings (P/E) ratio of 18.5, compared to a five-year average of 16.2.
But Stuart Williams, head of equities at Nikko Asset Management, said while that seemed expensive, it did not mean the stocks were overvalued.
“Most people who look at equity valuations look at P/E. They look at that and go it looks elevated versus its history, which is true. But history is largely irrelevant when you consider history is full of much much higher interest rates.”
He said when the OCR was 5% or 6%, that was a different investing landscape.
“Equities are elevated but for a good reason, supported by interest rates and in recognition of the quality of a lot of the companies we have in NZ and ticking the box for how good New Zealand is.”
He said investors who had money coming off term deposit had limited options.
“If their money rolls of deposit or if they had some Auckland Airport bonds at 5.5% or 6%, what are they going to do? If they put it in the bank at 2% and pay tax on it it’s not going to pay their Auckland City Council rates.
"People talk about a low inflation environment and that’s correct in an aggregate sense for the Reserve Bank but it’s completely incorrect in terms of what I’d call unavoidable inflation. People feel alright because they can put fuel in their car but in terms of school donations, rates, life insurance, medical insurance, doctors’ visits, none of these things are going down. It forces people into something other than cash.”
He said equities seemed more appealing because people needed income. “This is a good environment for equities.”
While rising interest rates could affect the market he said they were likely to go down rather than up over the coming 18 months.
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