Stretched valuations make allocation decisions harder: Researcher

The founder of an independent New Zealand research firm catering for fund managers and advisers says having the right information is increasingly important as asset valuations start to look more and more stretched.

Tuesday, June 13th 2017, 9:00AM 1 Comment

by Susan Edmunds

Callum Thomas launched Topdown Charts, from Queenstown, at the end of last year.

He said its services were aimed primarily at fund managers but it had been of interest to advisers, particularly those who were focused on active management.

He said advisers were concerned about valuations. “Particularly the US market. That’s one that people look at most on the over-valuation front. There are a lot of signs there that are similar to what we saw going into the dotcom boom. It raises a tricky challenge – do you pull back your allocation based on the valuation, and you might miss out on another who knows how much percentage return?”

He said New Zealand’s share market looked similarly stretched. “Valuations are on the expensive side, especially compared to recent history.”

There were some good reasons for that, he said, including the recent influx of KiwiSaver money, strong dividends encouraging investment and New Zealand’s economy being attractively stable and strong by international standards.

But when people were allocating capital, it made sense to be more careful when valuations hit expensive levels, he said. “Although it depends on the risk appetite you’re running.”

He said, for the market to turn in either country, something would need to happen. “You need some sort of catalyst,” he said.

A change in US monetary policy, with less stimulus, could start to turn the share market’s fortunes, he said.

Thomas said research was a competitive field to start up a business in.

But new rules in Europe that require investment banks to break out research as a line item in their fees for clients would help to level the playing field with independent providers, he said.

“In some ways it makes it easier to compete because you’re not competing with something that’s being given away free.”

Tags: research