KEY POINTS:
Bear market rallies, corporate activity to take advantage of low prices, and distressed private equity owners may offer enticing opportunities after a woeful year for equity markets, says AMP Capital Investors.
Equity markets have offered little for investors to cheer about and returns for AMP Capital, New Zealand's largest private sector fund manager, reflect this.
"Basically the higher weighting towards shares or growth assets the worse the return," said AMP Capital's head of investment strategy Jason Wong at the company's quarterly update yesterday.
The US economy was now 13 months into recession and there was little indication there would be a turnaround anytime soon.
"With a great deal of confidence we can say that the US recession will be longer than average, and that's what you'd expect with a banking market crisis - this is not a vanilla recession."
The gloomy international situation was coming hard on the heels of a homegrown recession which began early last year.
"This second phase is going to be potentially worse than the mild recession we've had until now," said Wong.
"The next phase is going to be one where there's lots of job losses."
Wong also expected the New Zealand dollar to continue weakening.
On the upside, Wong believed most of the gloomy outlook was already priced into New Zealand shares. That asset class lost 11.2 per cent over the quarter for AMP against a 12.6 per cent loss for unhedged international shares.
Wong said the local market, due to its lack of financial and commodity stocks, was less likely to move as low as overseas markets on the way down, or as high in eventual rallies.
"We consider the New Zealand market to be a lower risk market in this environment."
Wong said even bear markets threw up some chances to make money.
"You can get substantial rallies - even if equity prices are generally falling you can still get massive opportunities to re-weight into equity markets and tip back out again.
"A lot of people will have taken the view we have where we're just on the sidelines for now with things still looking pretty ugly. But our bias is to want to be invested in this market so the first hint of news that things have turned the corner and we'll be in there like a flash and get those sorts of violent market reactions."
AMP Capital head of equities Guy Elliffe noted New Zealand listed company valuations were at levels that could create some corporate activity.
"People tend to forget that there's still private equity funds out there with cash that has to be invested. They can't leverage that to the extent that they could pre-2008 so that the financial mathematics means it's more difficult to justify the attractive premium to current prices, but we still think there's going to be some private equity transactions."
On the other hand, some of the private equity deals done here at the peak of the leveraged buyout boom a couple of years back represented "a huge area of vulnerability," Elliffe said.
"You've got the combination of higher interest rates plus economic stresses.
"A lot of those private equity models tend to be relatively well leveraged and I suspect that some of the assumptions they made about cashflows in the businesses they invested in are looking somewhat suspect.
"There are pressures there, which could be interesting to us because they might be forced to come back to the equity market to replace this financing so there might be some opportunities over the next year or two."
GROWING PAINS
* AMP Capital's growth oriented Balanced Fund, which has a 60:40 weighting towards growth assets, lost 5.7 per cent over the December quarter and 10.5 per cent over the December year.
* Its Growth Fund, which is 90 per cent weighted to growth assets, lost 13.8 per cent for the quarter and 24.5 per cent for the year.
* AMP's Conservative Diversified Fund returned 2.4 per cent for the quarter and 6.8 per cent for the year.
* Cash returned 2.2 per cent and 9.2 per cent.
* Global property was the worst performing asset class, losing 38.5 per cent over the quarter.
* Global bonds were the best performer, returning 9.5 per cent.
