Runaway market

By ELLEN READ

Former All Black Marc Ellis is better known for his irreverence than his financial nous. But dressed in a collar and tie at his soon-to-be-floated Charlie's juice company, he looks and sounds every bit a cool and composed financial analyst.

Ellis, an active investor in New Zealand shares for the past 10 years, has recently pulled out all his cash to invest in Charlie's and buy a house. But he still plans to return to the runaway market.

All the fundamentals stack up, he says.

"The Kiwi market is one you can have a bit of fun in and you can have a tangible relationship with the brands because you know them. And compared with price-earnings ratios overseas, ours are low and represent a good investment opportunity."

In a Wellington tower block, Tore Hayward, chief investment officer of AMP Capital, the country's largest fund manager, is more circumspect.

"It would be foolish to project continued strong rises like we've had into the future," he says.

But in the bush-clad West Auckland suburb of Oratia, the less public face of the New Zealand market, Bryan and Gay Trenwith, are enjoying a generous income after years of careful investing. They are keeping their cash in the market for the moment.

When the NZSX-50 Gross Index was launched on March 3 last year with a base value of 1880.85, its value was $30.53 billion. Yesterday, the index closed at 2854.96, having hit an all-time high of 2860.82 on Tuesday. It is now worth $43 billion.

Despite the rise, this is still below the peak of the old NZSE-40 index in the 80s. The NZSE-40 was replaced as the benchmark in March last year with the NZSX-50, which takes into account investor returns and weights the index relative to shares not locked up by cornerstone shareholders.

Nevertheless, thousands of people have benefited from the strong market. There are no official statistics, but it is thought that a third of New Zealanders own shares. Some of these holdings are likely to have come from the privatisation of publicly owned companies or sharemarket listings of mutual societies such as AMP.

Even when these distortions are excluded and active share traders are counted as those who have bought or sold in the past year or hold more than three stocks, a still-significant 10 to 15 per cent of New Zealanders have a stake in the market.

The market's strength is a reflection of the strong New Zealand economy at a time the outlook for global growth deteriorated.

And although fears that the good times could come to an end remain, the consensus appears to be that there is still plenty of potential for surprise. Company earnings are robust and share values relative to profits, while high, are not over-inflated.

ABN Amro equity strategist Frank Jasper says the market "is still a little bit cheap but it's within a couple of

per cent [of full value]. Earnings have been very good, the economy has had a strong run," Jasper said, adding that the market had been re-rated on views that local companies were now more robustly managed.

A lot of money is coming into the market as takeovers for firms such as powerlines group Powerco and gas pipelines group NGC run their course.

Firms such as wood products groups Carter Holt Harvey and Tenon are returning hundreds of millions to investors. All this cash needs to find a new home.

Jasper says: "I think you're getting more institutional interest in New Zealand markets [from Australia] on the back of them looking to expand their investment universe."

The Cullen superannuation fund is also still growing and is expected to place potentially billions into the market in the coming years.

The buoyant market has also sparked $1.35 billion of new equity funds raised on the NZSX and NZAX, including $675 million raised through IPOs. This has included seven new listings on the smaller companies NZAX market and 19 on the main board NZSX.

Ellis expects to join the trend with Charlie's, but is coy on timing and details, saying only "sooner rather than later".

"We'd like to list the company. We've got a lot of people who are interested in what we're doing and we believe we can get some smiles on some faces."

NZX chief executive Mark Weldon, who has won plaudits for modernising the once-staid market, is delighted with the run. And he naturally puts a brave face on the future.

"Twelve months ago, if you go back and read the analysts' reports, they were all saying it was fully priced then."

He says that even if this is the case, it doesn't mean prices are going to fall and dividends remain high.

"Some of the stocks are paying a 10 per cent dividend so that doesn't mean you shouldn't buy them."

Weldon said the capital appreciation might not be as great but New Zealand was in the top three countries in the world for the level of dividends paid out.

"I think there is a bit of a mindset here that it's like, 'Oh heck, things are going well, surely something must be about to go wrong'."

He doesn't have a strong view on future direction - and if he did, he wouldn't say it publicly - but he can see no sign in the fundamentals of any imminent catastrophe. "There's more money going in to the market, the superannuation structures are better, the basic business fundamentals are good and the companies are performing quite well."

Good overseas investor interest in local companies is also boosting prices and sentiment.

Weldon said NZX had been contacted directly by overseas brokers trying to hook into New Zealand shares and feedback from brokers suggested there was a lot more overseas investment in the local market these days.

"On a risk basis, stocks look pretty good compared to some of the other instruments out there," he said, singling out junk bonds and some finance debentures as particularly risky.

He also expects more capital raisings. "You're not going to see an explosion or a complete stop. You want it to be somewhere in the middle because that's a healthy market."

Despite the optimism, there are clouds. The strong dollar could squeeze key foreign exchange earners such as rural New Zealand and tourism.

At the same time, labour shortages, the slowing housing market and a decline in the number of immigrants could take the heat out of economic growth.

First NZ Capital strategist Jason Wong highlights the risks of slower growth and higher interest rates: "We wouldn't be surprised to see New Zealand equities turn from an outperforming asset class to an underperforming one, but the high yield of the market and significant amounts of cash being returned to investors limits [the] downside risk."

Warren Couillault, a fund manager at small company specialist Fisher Funds Management, sees the market slowing in the next 12 to 18 months as the economy and housing market slow and higher interest rates hit home.

"You've got to say that things will slow down. The differential rate between New Zealand and others will narrow and people will start putting money elsewhere."


At the retail end of broking, Direct Broking's Brett Wilkinson says higher oil prices, now more than US$50, and continued terrorism threats have hit investor appetite for risky shares.

Punters will continue to look for companies with strong and reliable cash flows, he believes - "something that is easier to say than do." AMP's Hayward says the outlook for international shares is looking stronger relative to local shares by the day.

"If we were to alter our asset allocation, it would be to take money out of New Zealand equities and put it into offshore equities as distinct from taking it out and putting it into cash and bonds. It doesn't look like it's reached significant over-valuation that would suggest switching from New Zealand equities into bonds."

Hayward is now expecting similar returns from New Zealand equities, inclusive of tax credits, that are expected from hedged global equities.

"If we go back in time, it is unusual for New Zealand equities not to offer an expected return premium on global ones."

But such esoteric discussions don't bother the Trenwiths in Oratia - they focus on management and trusted advice. And on both scores the New Zealand market is showing considerable improvement.

Bryan Trenwith attends annual meetings and is a big fan of site visits organised by the Shareholders Association.

"You see CEOs exposed to questioning and their credibility is on the line."

Another factor in the Trenwiths' decision to stick with stocks is the growing credibility of the NZX.

"I don't think that there are behind-the-scenes deals for the boys like there used to be. I think it is more open, more honest, more credible and I think it has made tremendous progress."

In the long term, as smart investors know, this is what matters most.

MOM AND POP


Bryan and Gay Trenwith began buying shares seven or eight years ago, seeing it as an easier income than dealing with the hassles of rental properties. The couple have seen different sectors come and go in popularity.

"The big thing to be in used to be Telecom and now the thing to be in is commodities and power companies. Over the years there have been sectors come and go," Bryan Trenwith said.

He gets his investment advice from an adviser and also spends a lot of time on the internet collecting information.

"The decisions are mine but the advice I get is so good that I couldn't manage without it," Trenwith said. He attends annual meetings and is a big fan of site visits organised by the Shareholders' Association.

"You see chief executives exposed to questioning and their credibility is on the line."

He's not predicting which direction the market will take from here, but is happy to go along for the ride.


SERIOUS INVESTOR


Former All Black Marc Ellis bought his first shares 10 years ago. Now, he's on the brink of taking his own company, Charlie's, to list on the market. He can't say when yet, but thinks a listing will bring smiles to a lot of faces.

Ellis says it's a growing trend for top sports stars to seek investment advice - knowing how to handle the big amounts of money they get paid for a relatively short sporting career is important.

While he's sold his portfolio to expand Charlie's and to buy a house, given more disposable income Ellis would happily reinvest.

He says there are some very good local companies and that, given the NZX's increased credibility, investing close to home gives the added advantage of knowing the brands.

Armed with a marketing degree from Otago, Ellis knows what he's talking about and can roll out the big words and technical terms.