Market surge sparks bubble warning

The continued increase in share prices both in New Zealand and overseas has prompted fund manager Tower Investments to warn of a potential bubble in financial markets.

Wednesday, January 23rd 2013, 3:19PM

by Niko Kloeten

At a media briefing in Auckland, Tower Investments chief executive Sam Stubbs said share prices would likely continue to rise in the next year, but this would be driven largely by central bank policy rather than strong economic fundamentals.

New Zealand’s share market is coming off a bumper year in which the NZX50 index returned more than 24% and other sectors such as listed property have boomed despite overall economic growth remaining subdued here and abroad.

“Economies are not markets and markets are not economies,” Stubbs said. “Markets have been supported by low interest rates and governments effectively printing money. We believe there is now a recipe for particularly a stock market bubble arriving.”

Stubbs said Tower had predicted a rise in stock markets last year although it had been surprised how well the New Zealand market had performed.

But he said with interest rates even lower and more money being printed by the US Federal Reserve than this time last year, the good times are likely to continue for a while yet.

“They’re spiking the punch,” he said. “The party is going to carry on and there’s a risk of getting out of control this year with regards to asset prices.”

Stubbs said there was a strong possibility of “irrational exuberance” by investors, with higher prices being mistaken for quality.

“This is the year that we will see mutton dressed up as lamb.”

Tower Investments portfolio manager – equities Stephen Bennie said one of the themes of the past year had been investors seeking quality companies

But stretched valuations mean some companies are “masquerading as quality”, he said.

“Nearly half of NZX50 companies are trading at 15 times earnings. That’s saying there are 30 or so quality companies in New Zealand which we think is an overstatement.”

The New Zealand Superannuation Fund returned 19.17% for the 12 months ended December 21.

It finished the year at a recford high of $20.92 billion, up from $17.73 billion in 2011.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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