How good? Just ask the chimp

By PAUL PANCKHURST

A Chimpanzee throwing darts in the dark would have picked a winning portfolio of shares. A fool and his money would almost certainly not have been parted. Blind Freddy would have made a killing.

Yes, it really was just that good on the New Zealand sharemarket for the 12 months to the end of March.

The NZSX50 - a gross index that factors in dividend payments - gained 34 per cent.

The old index that the exchange has just killed off, the NZSE40, rose by a less spectacular 22.5 per cent.

(Handy that - killing off an index that matches key international benchmarks but reports inconveniently low returns.)

Those figures compare with the rule of thumb that says the New Zealand sharemarket returns about 9 per cent a year, including dividends.

The strong run over the 12 months was largely a worldwide thing.

"People have gone from being scared of shares to liking them again," says Campbell Millar, a research strategist at sharebroker Goldman Sachs JBWere. "It's been a global phenomenon."

It was also a local thing.

"It's been a ridiculously strong economy. I'm not sure that anyone would really have seen that the economy was going to have this sort of resilience and power."

Another factor was the traditional lure of New Zealand's dividend yields, touted as among the highest of the world's developed markets.

Millar says New Zealand's performance is "pretty good, but it doesn't stand out on a global scale".

Take, for example, a gross index that includes Asia Pacific countries such as Hong Kong, Singapore and Taiwan.

That put on 59 per cent.

A wide European gross index gained 38 per cent.

The broad Standard & Poor's 500 index in the United States - which does not include dividends - rose 33 per cent.

In Australia, a gross index added 23.4 per cent.

Around the world, investors have "re-rated" equity markets, pushing out the price/earnings multiples - the ratio of share price to annual profits, used to measure the cost of a company's shares.

In New Zealand, sharebrokers estimate the multiples have pushed out over the past year from 13 to 16 - meaning our share prices are now closer to those of the rest of the world.

"It's very hard now to find really obviously under-valued companies or opportunities," says Millar.

"I don't think the market is expensive, but I don't think it's cheap."

But local sharebrokers highlight a difference between the gains here and those in the mother of all markets, the United States.

A Merrill Lynch study quoted in Forbes magazine says the most sickly shares in the S&P 500 - the companies rated lowly by Standard & Poor's for growth and stability of earnings and dividends - were the stellar price performers of last year.

Those rated "C" or "D" for quality gained 81 per cent, while the "A+" to "B" stocks put on 26 per cent.

"The rubbish has risen to the top," is the way one broker puts it.

"A flight to garbage," was another pungent description from the United States.

A commentary in Forbes last month said dramatic advance in the US "has left many stocks too expensive and investor expectations too high".

"Today's valuations already reflect the economic recovery as well as good things to come for the next several years."

At local sharebroking firm ABN Amro Craigs, research manager Cameron Watson says that, in contrast, New Zealand's market performance has been driven by "our best companies".

"The fundamentals of our strongest companies have continued to improve."

Watson cites examples such as:

* Telecom lifting dividends.

* Fisher & Paykel Appliances forging a branding and distribution agreement with American giant Whirlpool.

* Carter Holt Harvey selling its tissue business for a higher price than the market expected.

* Auckland International Airport benefiting from growth in tourism.

* Contact Energy looking strong because of demand for power.

"While our market has risen," says Watson, "at least earnings and fundamentals have improved as well."

He estimates the market is trading at a PE ratio of 15 times, "which is far from over the top".

"Compare it to the dizzy heights of 30-times plus that the US market hit in the late 1990s at the height of the tech bubble."

An inevitably big factor in any examination of the NZSX50's performance is the 10-tonne gorilla of the New Zealand market, Telecom, which accounts for 27 per cent of the index.

Over the 12 months, Telecom's share price rose from $4.52 to $5.81 - a gain of 28.5 per cent for investors before dividend payments.

Two baby gorillas - wood company Carter Holt Harvey and power company Contact Energy - account for another 17 per cent of the index.

They, too, came through with big gains.

So much for investors' "green death" tag for forest-owners such as Carter Holt.

The biggest drag on the sharemarket's performance was The Warehouse, a company wearing the costs of an ill-judged Australian expansion.

It was exceptional among the top 10 stocks by going backwards.

Its share price fell 23 per cent to $4.30.

Other under-performers included Air New Zealand, fishing company Sanford, and fast-food operator Restaurant Brands.

At the Shortland Street office of sharebroking firm Goldman Sachs JBWere, Campbell Millar says: "If you look at the top 10 companies - and they account for most of the market - the thing that stands out is that all bar one made double-digit returns."

On the topic of what comes next, Miller goes for the line attributed to legendary US investor Warren Buffet: "It's only when the tide goes out that you can see who's been swimming naked."

He goes on: "The next big story for New Zealand is going to be the economic downturn that seems completely inevitable. In the downturn, we will see which ones are the really good companies - and which are not."

At ABN Amro Craigs, Watson says everyone is holding their breath, waiting for the effects of slumping exports - that high New Zealand dollar - or the possible bursting of the housing market bubble.

Many believe the market could come crashing down.

But crashes usually come when everyone is bullish and share prices are sky-high and divorced from underlying fundamentals. "Neither is true in New Zealand at present," says Watson.

His firm is "cautious" on the outlook.

He believes returns from all assets - bonds, overseas and local shares, "and even residential property" - are likely to be single rather than double digit over the next couple of years.

Dart-throwing chimps and Blind Freddy will not be winners.