New Zealand values most stretched in world
New Zealand equities are the most highly valued in the world on a price-to-earnings basis according to a ranking of MSCI indexes, but local commentators say that’s not necessarily cause for concern.
Friday, January 26th 2018, 6:00AM
by Susan Edmunds
The MSCI New Zealand Index, which is designed to measure the performance of the large and mid-cap segments of the New Zealand market, registers a forward P/E ratio of 22.6, and a 10-year average of 16.1, according to the ranking by Strategas Securities
That is compared to the S&P 500’s forward PE of 18.5 and 10-year average of 14.5. It puts this country top of the table, ahead of MSCI Norway in second place, MSCI Netherlands third and MSCI Czech Republic fourth.
Korea was at the bottom, with forward PE of 8.7.
Mint Asset Management chief executive Rebecca Thomas said there was no doubt the NZX50 was expensive compared to long-term valuations.
"But there have been a lot of overseas investors attracted to NZ because of the relative growth prospects here compared to countries overseas.
"When you look at long-run numbers, of course the constituents of the index change significantly over time and right now we have a lot of growth companies with large positions in the index, which on a weighted basis makes the overall index PE higher."
She pointed to A2 Milk, which is now number two behind Fisher & Paykel Healthcare. "Both of these companies are highly rated growth stocks. Fletcher Building and Spark have moved down the rankings, though still large companies, so the make-up of the index's PER has changed."
She said another forecast by Forsyth Barr had put the forward looking PE ratio at 17.8 - predicting higher earnings for the index.
Chris Tennent-Brown, a wealth economist at ASB, said New Zealand dividend yields were still good, even though valuations looked stretched on a PE basis.
“If you want to diversify your exposure to companies and want more than 4%, you’re not going to get it buying that company’s bond because those yields are so low at the moment. If interest rates stay incredibly low people are probably still going to want to take risk to get that yield.”
He said if something happened to push interest rates to move quickly some companies would start to look overvalued.
“Some companies in the New Zealand market and overseas trade on far higher PE multiples, growth stocks such as A2 for example. They need to deliver on a fair positive earnings outlook. If they do, then the price now is justified but if not it’s too high. There’s no doubt the market looks expensive relative to long run ratios like PE but if you did that ratio on bonds or cash they’re incredibly high as well. Cash is now 3% or 4%, when a few years ago it was 5% or 6%.”
He said the current situation of low interest rates and a good growth backdrop were supportive for shares value. ‘if that changed it could give sharemarkets a wobble.”
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