AMP Capital enjoys the fruits of recovery

Jason Wong. Photo / Mark Mitchell

Investment markets are in a "sweet spot" right now as they recover from the global financial crisis, says AMP Capital Investors, but the sugar high may start to wear off by early next year, warns head of investment strategy Jason Wong.

In a summary of New Zealand's largest private sector fund manager's investment overview, Wong said he expected the global economic recovery, which helped his company post some of its strongest quarterly returns in years, "to broaden and intensify over the next six months or so ... but the jury is still out on the sustainability of that recovery. At the moment we're coming off a low base and we're in a bit of a sweet spot."

That was apparent in AMP's investment performance over the September quarter with its balanced fund returning 6.6 per cent for the quarter and its growth fund returning 9.5 per cent. Even its "conservative" fund returned 3.4 per cent, while the cash fund returned 1 per cent.

Some returns from individual asset classes were enormous, with global property returning 36.9 per cent over the quarter more than making up for losses over previous quarters, with its one year return reaching 29.3 per cent.

Hedged returns on offshore equities were 21 per cent for the quarter and 29.4 per cent for the year, while New Zealand shares returned 13.1 per cent and 18.2 per cent.

New Zealand property was the conspicuous underperformer, losing 9.1 per cent for the quarter and 17.4 per cent for the year.

Based on the economic prospects of our major trading partners and also monetary conditions, which tended to be dominated by the exchange rate, Wong expected to see a period of reasonably good growth for New Zealand for the next 12 months.

He cited the increasingly upbeat tone of business and consumer confidence data, "and we think over the next six months or so you're going to see the harder evidence of that coming to fruition ... data should be quite positive for the next six to nine months".

That would lead to the RBNZ "capitulating" on its policy view that the OCR would remain at or below current levels until late next year.

While it was "tempting" to view equity markets as overvalued after their strong run this year, AMP believed there was more upside to come.

"Our next stage for equities is for earnings to support that rally. If anything we think there's scope for positive surprises on earnings and on the global economy for the next six months or so."

Nevertheless, Wong said AMP had "lingering concerns about the sustainability of growth" beyond the middle of next year for the US, UK and Japanese economies, which influenced our own prospects.

"We don't think you have to worry about that just yet, time is on your side. The area of most interest is likely to be the second half of 2010 onwards. As markets are forward looking about six months or so we might start worrying about that early next year."

For the remainder of this year, it was time to make hay and AMP's key strategy at present was to go overweight against its benchmarks on global equities.

"If earnings growth went up 25 or 30 per cent, which we think is quite possible and achievable from a low base, we will get a further reasonable sort of run in equity markets."

AMP's view on New Zealand shares, while positive, was not so rosy. Following gains since March the price to earnings ratio on local shares was now in "expensive territory".