NZ Herald business editor at large

Liam Dann: The investment that's hotter than Auckland property

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A house for sale in the Auckland suburb of Remuera. Property in the city is seen as a good investment because of soaring prices. Photo / Getty Images
A house for sale in the Auckland suburb of Remuera. Property in the city is seen as a good investment because of soaring prices. Photo / Getty Images

What kind of amazing investment could outperform the property market in this country? The NZX-50 as it turns out.

Both the sharemarket and the property market have been on a stellar bull run since the Global Financial Crisis-inspired lows in 2009.

There are no prizes for guessing which one has dominated the media headlines and public debate. But on a gross index basis the NZX-50 has outperformed even Auckland's super hot property market since 2009.

Both markets bottomed out after the crash at the start of March 2009.

Since then Auckland median house prices have soared 92 per cent according to REINZ figures. Meanwhile the NZX-50 is up 185 per cent (as at last Friday's close).

Even on capital index basis - which doesn't include dividends - the NZX-50 is up 103.7 per cent in this period.

That's an incredible result by any measure but particularly when you consider the tax advantage that property investment has enjoyed for most of this period.

It would be nice to lay the credit for that run firmly on the performance of local corporates. There have been some excellent performances -- F&P Healthcare, Air New Zealand, the rise of Xero and the Spark turnaround spring to mind.

But clearly there are big economic forces at work as well.

The GFC ushered in a period of ultra-low interest rates and somehow the emergency settings have become the new normal.

Auckland median house prices have soared 92pc since the GFC. But  the NZX-50 is up 185pc.
Auckland median house prices have soared 92pc since the GFC. But the NZX-50 is up 185pc.

As Warren Buffett emphasised at his Berkshire Hathaway annual meeting last month: "The low interest environment makes businesses more expensive and cash less valuable."

Then there are the demographics of the baby boom in the West and China's growth story in the East which mean we have a historically unprecedented mountain of savings looking for a home at a time of historically unprecedented low interest rates.

It is hardly surprising that assets like stocks and property are running red hot all over the world.

Of course that begs the question: are we due for a crash?

After an ominous and potential bearish start to the year it looked like the correction might be upon us.

There are no shortage of pessimists in the United States ready to predict the next crash. They'll be right eventually. Wall Street stocks may well be overvalued versus real earnings and the imminent rise of US interest rates could bring them back down to earth.

Auckland median house prices have soared 92 per cent according to REINZ figures. Meanwhile the NZX-50 is up 185 per cent (as at last Friday's close). That's an incredible result by any measure but particularly when you consider the tax advantage that property investment has enjoyed for most of this period.

Hopefully the seemingly endless signals from the Federal Reserve and a slow pace of rate rises should ensure an orderly correction when it comes. But history suggests it probably won't be and when the you throw in the wild card of the Chinese economy it seems highly plausible that we will at least see a repeat of January's turmoil in the next 12 months.

Investors in the New Zealand market will be relying on some strong underlying value in New Zealand companies. That will underpin our market if and when Wall Street decides its time to take a tumble.

The good news is that the market is still dominated by companies with solid operating earnings and good dividend returns.

During the financial crisis the NZX-50 fell 44 per cent from the peak to the trough. The S&P-500 dropped 57 per cent.

There are few hot stocks which are soaring on strong growth stories.

There's Xero of course, and Orion Health (up 48 per cent since January one) and Comvita (up nearly 200 per cent in 12 months) also fits that bill.

That's not such a bad thing for a market that otherwise risks looking a little boring. But when volatility returns we can be sure the power companies will keep generating and the planes will keep landing. Unlike 1987, the local market is not loaded with speculative stocks. It is well-balanced and weighted towards solid sustainable businesses.

That it is in good shape is no accident after years of hard work by those involved in running, regulating and operating in it. For all the fair winds of the global economy, the local bull run of the past seven years is something the industry should be proud of.

- In response to some of the comments about sharemarket returns including dividends, I have included the capital index returns (which exclude dividends) for this period. At 103.74 percent they are still head of the capital return for Auckland property at 92 per cent.

Debate on this article is now closed.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

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