Bull run reaching end of its tether - NZ Herald (2024)

Smart investors have, for the most part, been richly rewarded by stock markets in recent years.

Since August 2011 the NZX 50 gross index has gained close to 80 per cent. Take the starting point back to March 2009, the lowest point for New Zealand equity values during the global financial crisis, and you're looking at a more than 120 per cent gain.

So can the same kind of returns continue, or is the bull market set to run out of steam?

A benign inflation environment means New Zealand's Reserve Bank will probably hold interest rates at the historically low level of 3.5 per cent for most, if not all, of 2015.

That means equities - especially those that offer solid dividend yields such as Mighty River Power, Meridian Energy and Auckland Airport - will continue to offer an attractive alternative to bonds and bank deposits.

That hunt for yield has been a major driver of rising stock prices in this country.

However, after so many years of strong returns this country's sharemarket has become expensive.

In its 2015 outlook report, investment firm JBWere is picking the New Zealand sharemarket to deliver "mid-single-digit returns" in the year ahead. That would be a big drop on the 18 per cent and 16.5 per cent gains it provided in 2014 and 2013, respectively.

The report said the Reserve Bank's interest rate pause should provide ongoing support for the New Zealand equity market.

"But this alone will not guarantee a positive return for the coming year," it said. "We are also mindful that a significant portion of our market is heavily weighted to domestic consumption and we see signs of that moderating from here as farmer payments decline [due to falling dairy prices] and we pass the peak in construction activity following maturity in rebuilding Christchurch." Rickey Ward, JBWere's NZ equity manager, said a major influence on his expectations for less buoyant market conditions was the elevated valuations of Kiwi stocks.

The New Zealand market is priced at 18 times forward earnings, according to the report.

"You really are paying more than necessary for tomorrow's lunch," Ward said. "It's really hard to see how the [share] prices would significantly increase from here short of a real sharp increase in the economy and we simply don't see that." Craigs Investment Partners head of private wealth research Mark Lister also said New Zealand shares were getting pricey. "We think investors need to focus on companies with clear earnings growth opportunities." Plummeting oil prices and Russia's economic woes sent shivers through global markets during the closing weeks of 2014.

But JBWere strategist Bernard Doyle said lower oil prices could benefit investors.

"It's basically a wage increase for consumers around the world," he said. "And it will almost certainly make central banks more reluctant to raise interest rates. Whilst we still expect the [US] Fed to raise rates in 2015 they will have less of a sense of urgency around that action simply because lower oil prices are going to keep a lid on inflation."

In the report JBWere said a positive economic outlook in the United States made US equities tempting, but valuations in that part of the world, like New Zealand, were elevated.

Europe, on the other hand, looked more attractive, with the European Central Bank likely to begin quantitative easing during the first quarter of 2015.

"Investing in the wake of aggressive central banks has proven an important source of returns in recent years."

Of the emerging economies, JBWere said Taiwan and India were its favoured exposures.

Mainland China's stock markets went on a mega-rally in the latter part of 2014, rising almost 25 per cent between November 20 and December 17.

But Doyle said the surge was being driven by retail investors in that country getting a taste for equities rather than market fundamentals.