The New Zealand sharemarket has had an outstanding year. Most markets around the world have had a good run in 2012, but New Zealand's has been exceptional. The market has risen 22.6 per cent so far, compared with Australia which is up 12.7 per cent, the United States 12.6 per cent and European shares 8.9 per cent (all including dividends).
These are all excellent returns, especially when you consider how bad economic news has been all year, but New Zealand's market has provided almost double the return. The NZX50 has even trounced the booming Auckland housing market, where prices have risen 10.9 per cent this year according to the Real Estate Institute.
So what's caused such a stellar run and can it continue, or has New Zealand gotten a bit overheated and are we about to see a correction?
There are several key reasons why New Zealand's market has been so strong. For a start the economy isn't in bad shape compared with many other countries. There are issues, such as the high currency making life difficult for parts of the manufacturing sector and the unemployment rate being higher than they would like. But government debt is low, they haven't resorted to printing money and they export twice as much to Asia and the developing world as they do to the United States and Europe.
Many New Zealand companies are doing all the right things as well. In just the last week, it was announced that the Christchurch rebuild is gaining momentum, a retirement village operator increased its growth projections and a major exporter posted an 18% profit and upgraded its earning guidance for next year.
But perhaps the most dominant reason is the persistent low interest rates they've had in recent years. The floating mortgage rate was 10.3 per cent five years ago and now it's 5.7 per cent, which is great for all the mortgage-holders out there because their monthly payments have fallen by a third. If people can manage it, hopefully they've left the payments constant and are now paying their loans back much faster.
But consider the retired folk who are counting on the interest from their nest eggs to supplement the income they get from their national super. They quite liked those high interest rates from a few years back. For them, the 8.2 per cent they were getting on their bank deposits in 2007 is now sitting just below 4.0 percent. While their living costs and other commitments have continued to rise, they've had a 50 per cent pay cut with no sign of a reprieve on the horizon.
These investors have been forced to look elsewhere to get those nest-eggs working for them again. Enter New Zealand shares and listed property trusts, paying dividend yields of 6.5 per cent and 9.0 per cent respectively, and we can see why the New Zealand market has been so popular this year. Forget about whether the share prices go up or not, as long as the dividend cheques keep rolling in every quarter they are beating the bank by a pretty wide margin. While it's been more of a bonus for many, the capital growth has actually been quite impressive too.
Trying to forecast where things go from here is, as always, the hard part. On traditional measures the market looks a likely pricey, but not ridiculously so. Even after a 22.6 per cent rise most shares are still offering dividend yields of between 5.5 and 6.5 per cent, more than investors can find anywhere else.
Growth prospects aren't bad either for most companies on the NZX. More than 80 per cent are forecast to make a bigger profit this year than they did last year and to grow that profit again in 2014 - with double digit increases in both years. Would a property investor sell an investment property that was already paying a 5.5 per cent yield and was in line for a 10 per cent rent increase next year and the year after that?
To keep investors worried, there is the usual multitude of risks out there and the main issues are the same ones they've been worried about for some time - namely high debt levels in Europe and the United States. These risks cannot be underestimated, but there are also some positives.
China is improving and we are beginning to see signs of a rebound in its rate of growth. This has started to emerge in manufacturing data, retail sales and exports, all of which have looked better recently. This worst may have passed for China and we might just see a rebound early next year as the new leadership takes hold.
America is also making some progress, economically at least if not politically. The housing market is finally showing sustainable signs of life with even Las Vegas seeing house prices rise last month, the first annual increase for the city in over five years.
Looking forward to next year, New Zealand's market is expected to level off rather than fall back. They are unlikely to get another stunning performance like this year has provided, but modest dividend yields should at least underpin good quality shares at current levels. A bit of growth in economic activity associated with the Christchurch rebuild should also provide a small boost.
However, investors that are looking for opportunities across the world's sharemarkets for the year ahead might find more interesting prospects further afield than locally, particularly as some markets have lagged New Zealand by a fairly wide margin.
Australia, for example, remains completely out of favour with investors. But a recovering China might soon turn sentiment for the mining-dependent country and the Federal election next year could lead to some positive leadership changes. Interest rates have been cut aggressively over the last year in Australia, from an OCR of 4.75 per cent to just 3.25 per cent today. The impact of these hasn't completely flowed through to the economy but it will, and we've all seen what decreasing interest rates eventually did for the New Zealand sharemarket.
Mark Lister is the Head of Private Wealth Research for
Craigs Investment Partners (formerly ABN AMRO Craigs), which is one of New Zealand's largest independent investment firms.
He joined Craigs Investment Partners in early 2004 as an equity analyst specialising in property and small cap research. In 2007, Mark was appointed Head of Private Wealth Research for Craigs Investment Partners.
