Reasons to stay at home
ING's senior investment manager Amanda Smith gives you good reasons to keep money invested in the New Zealand sharemarket.
Monday, October 7th 2002, 3:33PM
It’s often been said that when America sneezes, the rest of the world catches a cold. However, over the past 12 months, that analogy has been wide of the mark – at least in terms of the New Zealand sharemarket’s performance.
Based on the latest reporting season – the best in five years – New Zealand companies are currently delivering strong profits, many having surpassed analysts’ forecasts with double-digit earnings growth.
Senior investment manager and New Zealand equities specialist with ING New Zealand, Amanda Smith, says this outperformance is not a flash in the pan. “It has been building momentum perhaps even as far back as the infamous sharemarket crash of 1987.”
Now after many years of trailing the benchmark MSCI World index, the NZSE-40 has finally succeeded in outperforming international shares – the former darling of investors.
“Even with the stellar performance of international shares during the late 1990s, the 10-year return of the New Zealand sharemarket is actually superior to the 10-year return as measured by the MSCI*.
Another interesting development is the new make-up of the New Zealand sharemarket’s top 10 stocks, compared with those listed in 1987. Today, only two or three familiar names remain in the pool – and even these operate under very different structures and management styles.
Smith says this is a significant point. “While many US companies are currently going through severe accounting issues, New Zealand has already ‘been there, done that’.”
This is evident from the many Class of ‘87 stocks that have subsequently failed, broken up or been taken over, which Smith suggests is mainly because they were poorly run or had ‘overgeared’ themselves.
As investors may recall, it took New Zealand some time to recover from the fallout of this situation. However, Smith believes the lessons learnt have been worthwhile, and the subsequent corporate restructuring and rebuilding has placed the New Zealand sharemarket in a much stronger position.
ING’s own investment style is to invest in companies with sustainable earnings and strong cashflow. In other words, a company’s financial accounts need to be able to withstand intense scrutiny and show not only strong past performance, but also promising prospects.
Stock selection is not limited to any one sector of the market; ING looks for opportunities equally across small, medium and large-cap companies. A further edge to the company’s investment style is its ability to exploit the different phases of market and economic cycles.
The sort of research and analysis required to make all of these assessments is not insubstantial. However, ING’s active management style in respect of New Zealand shares has consistently paid off, resulting in superior investment returns, compared with the relevant benchmarks.
* 9.9% vs 8.6% (including dividends)
While some commentators have been suggesting the New Zealand sharemarket may be nearing the end of a good run, Smith remains upbeat about prospects.
“Despite falling commodity prices and a firmer New Zealand dollar, we believe the agricultural sector is robust enough to weather these factors,” Smith explains.
She also points to the positive impact of increased immigration recently on the Auckland housing market as a factor that has helped to increase the wealth effect among house owners.
“Most of all, the recent company reporting season shows that New Zealand companies are in good shape,” says Smith. “In particular, they demonstrate good transparency (ie: openness, integrity), reduced risk and a solidity that was seriously lacking in 1987.”
This leads Smith to the conclusion that much of the local sharemarket is currently undervalued. She also believes that despite peaking economic momentum in New Zealand, reasonable gains are still likely over the next 12 months.
Finally, Smith highlights a subtle influence more likely to have a medium-term, rather than a short-term, effect – namely, the New Zealand Superannuation Fund.
“We estimate the fund will invest some $250-300 million a year in the local sharemarket, rising to around $800 million in 10 years’ time. Assuming this does happen, the result should be a welcome injection of money into our sharemarket, as well as the prospect of increased interest from offshore investors.”
In conclusion, Smith says New Zealanders have good reason to trust in their own sharemarket, thanks to the high quality of corporate management and financial integrity, as well as all the signs of sustainable earnings growth into the next 12 months or more.
“Overall, our market represents good value and offers investors some of the best prospects available at the moment,” she says.
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