Interest rates tipped to boost '20% overvalued' shares

AMP Capital says New Zealand equities may be at valuations 20% above fair value - but there are predictions higher prices are yet to come.

Wednesday, July 3rd 2019, 6:00AM

Mark Lister

Despite jitters earlier in the year, the bull market continues on the New Zealand share market, buoyed by low interest rates locally and around the world.

Australia cut its official cash rate to 1% on Tuesday and the Reserve Bank of New Zealand is expected to cut again in August.

AMP Capital analysts said that had driven a reach for yield that pushed up share valuations. But earnings forecasts were still below their April 2018 peak, making higher prices hard to justify.

The 10-year average PE valuation for the S&P/NZX50 was 18.7 times. It is now at 29.4 times.

“New Zealand equities have over-reacted to the move lower in yields. Our regression estimates suggest the market is 20% above the fair value implied by current ultralow yields.”

Mark Lister, head of private wealth research at Craigs Investment Partners, said the market was more expensive than it had been through history but that could be said of all assets and was expected in a low-interest rate environment.

He said it was hard to see a situation where values would fall when interest rates were so low. “That money has to go somewhere.”

The economy was slowing but still in reasonable shape, he said, and listed companies were doing well.

Central banks around the world were willing to step in to provide the stimulus required. Lister said it was not usual to see economies fall into recession, or share markets enter a severe downturn, when central banks were providing a good level of support.

“It’s a recipe for share markets to keep doing well… my guess is we will see share markets supported and see them continue to grind higher.”

There could still be some volatility among the upwards trajectory, he said.

The biggest risk was that unexpected inflation hit and central banks had to increase interest rates. “That would really upset the apple cart.”

Tags: equities