Strong sharemarket recovery but caution urged

The NZX-50 closed last week at 3148.86 after peaking at 3183.86 on Thursday. File photo / Kenny Rodger

The sharemarket has followed offshore markets higher in the last seven months in what has been a spectacular recovery from an even more spectacular meltdown over the last year.

But while market watchers hope for the best, here as in other countries, the sustainability of recent gains in the market and wider economy is by no means assured, and brokers recommend caution.

On Wall St shares fell on Friday as a government report showing an unexpected surge in the number of job losses in September prompted further retrenchment by investors.

The Dow Jones Industrial Average shed 21.61 points (0.23 per cent) to close at 9487.67.

For the week, the blue chip gauge surrendered nearly 1.9 per cent - its second consecutive weekly decline and the worst week-over-week decline since mid-June.

The NZX-50 closed last week at 3148.86 having peaked at 3183.86 on Thursday, its highest level since early October last year. During the intervening 12 months it troughed at 2417.95 in early March in the second of two precipitous dips, the first being in October.

The index has now gained almost 32 per cent over seven months and while that's not as much as some markets around the world that have risen by more than 50 per cent, "we're still doing pretty well", said Forsyth Barr's Guy Hallwright.

"The question is whether that's justified given the world's still got a lot of issues to work through. Our thinking is that there's not necessarily going to be a double dip ... but getting clear of this crisis and what's happened is going to take a number of years, and the market looks to us to have run probably ahead of itself." Investors should be mindful of that, he says.

"We're thinking that you wouldn't chase cyclical stocks. You'd tend to probably go back a bit more defensive, on the grounds that it's the cyclicals people have been chasing and that's what's pushed the performance. Some of that looks like the market's probably anticipating things a bit too much."

On the other hand he believed the sheer weight of money still sitting on the sidelines - and it's been observed that Wall St's recovery has been on relatively thin liquidity - may support the current upward momentum in equities so long as it continues to be redeployed there.

Kevin Rendell of Gould Steele and Co says the second leg of a "double dip" or "W" shaped pattern in economies and markets is still very much a risk.

"Once the finance sector appeared to have stabilised, people's confidence came back in, but the underlying real economy is still struggling in some areas.

"The essence of what we're saying to clients is it's still time to be cautious. The worst is over probably but we may stall before we recover again."

Although markets are by their nature forward-looking, even on that basis he questions whether economic data support the gains to date.

"Look at housing consent numbers for example, they're half of what they used to be. There are problems out there and that will continue to flow through given the lags between getting consents and doing something.

"The offset is aspects of say Government expenditure such as infrastructure spending, as that ramps up it may help a bit."

Nevertheless, he is hopeful the worst of the crisis has passed and investors can now focus on how companies are actually performing rather than being driven by fear or other sentiment.

"People will make judgments from now on on those factors," he said, adding that the most recent reporting season produced numbers slightly better than he expected.

Meanwhile, a survey of fund managers has found that half of leading portfolio managers thought New Zealand shares were now fairly valued, up from 25 per cent in the June quarter and none the quarter before that.

Russell Investments' investment manager outlook survey for the September quarter also found 40 per cent of managers in this country still considered the New Zealand equity market to be undervalued.

As might be expected in Australia, which escaped the worst of the downturn, portfolio managers were even more upbeat.

Russell found 65 per cent of local portfolio managers bullish to Australian shares, with not one respondent thinking local shares were overvalued.

Industrials topped the list with 69 per cent of Australian managers expecting an upswing in that sector in the next 12 months. Even retail was backed by nearly three-quarters of managers, Russell said.

However, Australian managers were not so keen on defensive stocks like utilities and telcos.

Global equities were attractive to both New Zealand and Australian managers, in keeping with the view of their colleagues in the United States.