Market wobbles 'signify need for active management'

Significant drops in price in a number of New Zealand equities this week are being held up as a sign it is a stockpicker's market.

Friday, November 3rd 2017, 6:00AM

by Susan Edmunds

A2 Milk and Synlait were some of the most significant falls this week, after a long, strong run.

A2 dropped from a high of $8.75 to $7.94 this week, although it showed signs of recovery on Thursday. Synlait dropped from $8.24 to $7.70.

Mark Lister, of Craigs Investment Partners, said, in the same way that much of the recent strength of the New Zealand market had been down to a few stocks, the recent drop had been limited to a few.

"If you take Synlait and A2 out of the mix, the market looks a lot more boring and sideways."

He said that was similar to what had been seen over the past year. The market was up about 11 per cent year-on-year, excluding dividends, but much of that was due to the strength of a few key performers.

The market was changing, he said, so the companies that relied on a strong housing market for success might find it tougher. Those that relied on a strong domestic economy might also encounter more headwinds.

But exporters would start to outperform as the dollar weakened. "It's swings and roundabouts."

Clayton Coplestone, of Heathcote Investment Partners, said it was a sign that active management was needed.

"This is simply not the right environment for investment complacency or passive mediocrity," he said.

"Many individual stocks that make up significant components of equity indices, are richly priced and are trading well beyond their future earnings potential. Unfortunately investors get caught up in the euphoria that accompanies these sorts of markets, and often overlook the simple rules of investment - including the fact that stocks often revert to the mean.

"Active management is critical at this time, as it helps to sift through the over-priced noise to identify appropriately priced investments... or in the absence of these; leaves the money in cash until individual stocks once again become fair priced or mispriced.”

Lister said it was "always" a stockpicker's market. Those who did not have A2, Synlait, Metro Glass, Xero and Air New Zealand in their portfolios would have struggled over recent years.

Investment adviser Grant Davies, of Hamilton Hindin Greene, said the recent drops were not a sign of a market change.

He said A2 had got ahead of itself, Fletcher Building had had a poor update and Metro Glass had been an underperformer for a while.

"When you look at the market as a whole, earnings are still strong, as are the dividend yields relative to returns on offer in other asset classes. These should underpin share prices, short of an unforeseen event impact world markets as a whole.”

Tags: Active v Passive Clayton Copplestone Craigs Investment Partners equities Hamilton Hindin Greene Heathcote investment Mark Lister NZX