The narrative regarding central banks and interest rates around the world has changed markedly in a few short months.
It wasn't long ago benchmark cash rates were at rock bottom, while many countries had been forced to go further with negative interest rates and other experimental initiatives. Many were expecting that dynamic to prevail for the foreseeable future, but suddenly the mindset has shifted.
Economic indicators are pointing to a pickup in activity, inflation is increasing and longer-term interest rates have rebounded from last year's lows. Markets are now asking central banks to justify their loose policy settings, and speculating on when this stimulus might be withdrawn.
The US Federal Reserve is ramping up interest rates, while the European Central Bank has told us that deflation isn't the worry it once was. In New Zealand and Australia, the next move is up with the only debate around when, rather than if.
This is all good stuff, and the world needs to stop relying on the artificial low interest rate life support.
However, it poses problems for local share investors because of the lack of depth in our market and a relatively modest group of companies that will do well against this changing backdrop.
Compared to other sharemarkets around the world, ours has a much higher weighting to property, utilities and telecommunications. The NZX50 has a 36 per cent exposure to these three sectors, much higher than the US market at 9 per cent, Europe at 11 per cent and Australia at 15 per cent.
These are excellent investments because of the reliable dividends they pay, but their growth prospects are more limited. With inflation and interest rates on the up, investors need less of these in their portfolios in favour of more growth companies.
Don't get me wrong, we've got some world class companies. Auckland Airport, Ryman Healthcare, Port of Tauranga and Mainfreight have track records of earnings growth that would make anyone envious. Fisher & Paykel Healthcare is a genuine global company, while Trade Me is back on track and finding ways to grow again.
We do healthcare very well and Summerset, Metlifecare and Ebos have also delivered strong returns. While the housing market might not provide the tailwind it has during the last few years, long-term demographics suggest this is a sector you want to own.
Younger companies like a2 Milk and Xero exhibit huge promise, but more volatility comes with the territory. The same goes for others in the agricultural space, like Scales and Comvita, given the unpredictability of commodity prices and the weather.
Restaurant Brands, Vista and Tourism Holdings are all a bit smaller, but none would be out of place in a growth portfolio, while Freightways has been a quiet achiever for many years.
That's a better list of options that I expected, so it's certainly not an insurmountable challenge. Maintaining a healthy foothold in the quality yield shares, while upping the exposure to some of these growth companies is the right balance to strike.
Beyond that, the size and lack of depth in our market means investors might need to broaden their horizons and look offshore to fill the gaps.