The New Zealand sharemarket has taken a breather from its record-breaking run, but prices remain elevated.

Wall Street, nearly nine years into its bull phase, smashed another record this week, the Dow Jones Industrial Average ending at over 26,000 for the first time.

Meanwhile the local market, which hit a record high of 8455.55 on the S&P/NZX 50 index on January 5, has been taking a back seat.

"There is no doubt that our market has had a fantastic run," Shane Solly, portfolio manager and research analyst at Harbour Asset Management, said.

Advertisement

"Now, there is a bit of a pullback, but the fundamentals are still fine."

The local market has been a star performer, even by international standards, over the last few years so a pause is not seen as being such a bad thing.

Analysts said the closely-watched US 10-year bond yield might have something to do with the market's relative underperformance.

The US 10-year bond yield, a key measure for market watchers, has risen from 2.40 per cent since the start of the year to 2.60 per cent this week, signalling that interest rates may finally be on the move.

M&As ahead?

"We have seen bond yields lift over the last few weeks globally," Matt Goodson, managing director at Salt Funds Management. said.

The local market, with its high proportion of utility-style dividend paying stocks, has acted as a substitute bond market for investors when world interest rates were close to zero. "In previous years, when those sorts of stocks were flying, the New Zealand market outperformed sharply, so I think that it is quite reasonable to expect it not to perform quite as well in this environment," he said.

A cut in the US corporate tax rate to 21 per cent from 35 per cent is driving much of the momentum in the US sharemarket, and the Dow's record this week was its ninth so far this year.

"There are very US-specific factors taking place with the tax cuts — with limited pass-through to New Zealand and Australian companies doing business there," Goodson said.

"Overall, the impact (of tax cuts) on the local market is positive but pretty minor whereas obviously in the US it's more significant," he said.

In price/earnings terms, the local sharemarket remains highly priced.

The p/e of the market it is almost at all-time record highs — near 21.5 on a one-year forward basis, Goodson estimates.

That compares with a 10-year average of 17, which in itself is high going back further in time, when bond yields significantly were higher.

While the market's overall price earnings ratio is high, the median p/e is significantly lower, Goodson said.

"There is a near-record gap between the average p/e and the median, which tells you that the large cap companies have been bid up.

"When you have that valuation gap, and when you have funding still looking relatively cheap, then an interesting thematic for 2018 will be whether we see some more M&A in this market," Goodson said.

Vodafone listing?

The possible listing of Vodafone New Zealand has been getting favourable media in Australia.

The Australian newspaper said plans for a float of Vodafone NZ appear to have been well received by prospective investors following a series of meetings late last year. Now the focus remains on how much the British parent company will retain once the operation is listed. An investor education roadshow was launched late last year and involved presentations on the business in New Zealand, Australia, Asia, Europe and the US.

A2 on roll, again

A2 Milk — one of the market's strongest performers last year — shot higher this week after the company revealed its US expansion plans.

Dual-listed a2 Milk said it planned to expand its brand of milk across the Northeast region of the United States from this month.

The company's shares last traded at $8.30, having rallied by $6.05 or 261.5 per cent over the last 12 months.