KEY POINTS:
Few brokers predicted the New Zealand sharemarket would turn in such a strong performance this year.
When brokers were surveyed at the end of last year, the market had enjoyed three straight years of more-than-robust gains, the economy was running out of puff and the dollar was squeezing
the exporters.
Summing up the spirit of the time ABN Amro included cash among its top five picks for the year. And Goldman Sachs JBWere said: "We like stocks with minimum domestic exposure, given our cautious view on the local economy."
Now, with the dollar trading close to the US69.43c at the start of the year, the economy has defied predictions of a sharp slowdown and continued to post growth - albeit below par. But the index of New Zealand's top 50 companies has risen 21.6 per cent over the period of the survey.
Private equity funds - mostly from Australia - have run rampant, buying firms such as chicken farmer Tegel and listed rubbish disposal firm Waste Management.
Investors, anticipating other sharemarket icons such a Fletcher Building or Restaurant Brands would fall to this new form of predator, have bid up the value of the stock market. And talk of consolidation has boosted returns.
Meanwhile, sentiment in New Zealand has been lifted by a strong run in overseas markets. The Dow Jones Industrial average and the FTSE 100 rose 14 per cent over the period of the survey, while the US high-tech Nasdaq rose 9 per cent.
In such a climate, even Forsyth Barr's portfolio - the worst performing - delivered a return of 18.2 per cent, which in other years would have put it near the top of the league table.
First NZ Capital's portfolio topped the rankings for the second year in a row with a return of 52.4 per cent, mostly due to a 145.8 per cent gain in Mainfreight, which benefited from a strong rise in earnings.
It also had a clutch of decent runs from Sir Ron Brierley's investment vehicle Guinness Peat Group, up 35.9 per cent, energy distributor Contact, up 34.2 per cent, and freight forwarder Freightways, up 39 per cent.
This year's picks reflect similar uncertainties as last year.
ABN Amro Craigs head of research Cameron Watson says: "We see growth slowing and interest rates remaining elevated well into 2007 which lead us to a cautious outlook for the market. Our picks reflect our top-down view and we have gone with ... high-quality companies operating in relatively defensive sectors."
Most brokers also highlight the potential for a weakening New Zealand dollar to boost exporters. But First NZ Capital, for one, is not trying to predict when the currency will fall. Instead, it has chosen stocks that it believes could see a sudden rerating from merger and acquisition activity or new management.
"This year we are saying the exchange rate could be a catalyst, but its difficult when you are looking at a one-year timeframe, when that is going to be reflected in share prices," says First NZ head of research Rob Bode. But the potential for nasty surprises is high, he says.
"A lot of the market is looking through some of the concerns on the exporters at the moment. If this dollar stays higher for longer that is going to present some challenges."
This year brokers show a higher degree of consensus. However, they picked three fewer companies than the 29 firms featured in last year's list.
Guinness Peat Group - which has returned a compounding 20 per cent a year since Sir Ron took the helm in 1991 - is this year's top pick, earning a place in five of the nine portfolios.
"GPG has a proven track record of investment out-performance, which we believe should warrant a premium," says Forsyth Barr.
Forsyth Barr warns any gains are likely to be limited to a large extent by uncertainty around the value of its investment in UK thread maker Coats. The business now represents around 48 per cent of GPG assets. Fletcher Building and Fisher & Paykel Healthcare are the second most popular, earning a place in four portfolios.
Hamilton Hindin Greene says Fletcher Building - run by newly appointed chief executive Jonathan Ling - has a positive outlook despite the talk of the downturn. It will benefit from the Government's boost to infrastructure investment.
"While residential building has slowed in New Zealand the economy is proving more resilient than many commentators were predicting. Fletcher Building is well positioned to achieve steady results with recent acquisitions providing a more diversified business which is better protected against the cyclical nature of the industry."
ASB Securities says: "Fisher & Paykel Healthcare's investment in product development has made it a leader in its field, and has provided a product pipeline that will deliver exceptional earnings growth well into the next decade."
ASB adds the persistently high dollar is obscuring Healthcare's performance currently and there is not another company better placed to benefit from the dollar weakening.
The third most popular stocks are Ryman Healthcare and Sky Network Television. The former is well positioned to gain from an ageing population and a play on the property market. The latter is reaping the gains of being the sole pay-TV operator in the country.
Forsyth Barr says: "We believe Sky's outlook is attractive because of its competitive advantage in bidding for content and its ability to leverage its content to grow earnings ... and the complementary upside that exists from owning Prime TV."
Top five choices: the analysts explain
ABN AMRO
* Sky City Entertainment: "Great assets, particularly the New Zealand assets".
* Sky Network Television
* Fisher & Paykel Healthcare
* Trust Power: "Favourable exposure to the energy sector."
* Wakefield Health: "It has good exposure to the ageing population and is well-placed to benefit from the strains that the ageing population may put on the public health system."
ABN AMRO CRAIGS
* Auckland Airport: "Tourism and passenger numbers will recover from the current trough and we believe this company remains one of the bluest chip companies on our market for the quality of its real estate, market positions, and quality of its earnings."
* Fisher & Paykel Healthcare
* Infratil: "Provides exposure to renewable energy with its investments in TrustPower and Energy Developments, as well as a range of other infrastructure assets."
* Port of Tauranga: "A quality asset and we believe log volumes (which remain a key driver of earnings) should recover."
* Ryman Healthcare: "Provides a defensive exposure to property and the aged-care sector which has a favourable demographic tailwind."
ASB SECURITIES
* Mainfreight: "We expect Mainfreight will continue to grow its offshore earnings rapidly in 2007, and expand margins in New Zealand and Australia."
GPG
* Fisher & Paykel Healthcare: "Fisher & Paykel Healthcare's investment in product development has made it a leader in its field and has provided a product pipeline that will deliver exceptional earnings growth well into the next decade."
* Ryman Healthcare
* Restaurant Brands: "We like the turnaround story in the KFC franchise and the potential for takeover now that the franchise renewal has been completed and Pizza Hut Victoria is soon to be gone."
DIRECT BROKING
* Summit Resources: "Gives exposure to the resource sector which is still a reasonable play in any portfolio especially if one takes the view that we are in a long-term bull cycle."
* Guinness Peat Group
* Fletcher Building
* Lyttelton Port: "With [shipping line] Maersk's decision to call at Lyttelton, we see an increase in business through more and more business through a smaller number of key ports."
* Pan Pacific Petroleum: "More of a speculative trade."
FIRST NZ CAPITAL GPG
* Fletcher Building
* Tourism Holdings: "It has been an interesting stock that has always looked cheap. But we think the emergence of this new cornerstone shareholder [a consortium led by Sterling Grace of the US] will help that value to be crystallised. It also has new management charged with restructuring as well."
* Renaissance: "We think that it is deeply discounted. It offers a 14 per cent yield, an ungeared balance sheet, 25c of cash per share and exposure to a strongly growing brand, Apple."
* CanWest MediaWorks: "Excellent relative value in a consolidating media sector."
FORSYTH BARR
* Contact Energy: "Offers excellent value given its positive long-term outlook to increasing demand for new generation."
* Fletcher Building
* Guinness Peat Group: "GPG has a proven track record of investment out-performance, which we believe should warrant a premium to [net asset] backing,
* Methven: "Well positioned to sustain earnings growth despite variable market conditions. In Australia a new range of shower-ware will help grow market share."
* Sky Network TV
GOLDMAN SACHS JB WERE
* Pumpkin Patch: "The accelerated pace of store rollout in the US and UK could crystallise more rapidly the substantial valuation upside from a major retail offer in these countries."
* Fisher & Paykel Healthcare
* Tower: "The recent separation of Tower New Zealand potentially enhances its attractiveness to other industry players ... [and] the recent takeover offer by Suncorp for Promina illustrates the strategic value of these types of assets."
* Sky TV
* CanWest MediaWorks: "MediaWorks can outperform the market in 2007, given its earnings momentum and the likelihood that it is subject to corporate activity."
HAMILTON HINDIN GREENE
* Fletcher Building
* Dominion Finance: "It has achieved strong earnings per share growth and offers investors a solid dividend yield. The company has a proven track record and trades on attractive fundamentals."
* Provenco Group: "A market leader in the electronic payment technology market. Growth opportunities exist through the increased review of security measures and their leadership."
* Ryman Healthcare
* Tower: "Following the geographic separation of Tower, management should now be able to focus more effectively on the New Zealand business."
McDOUALL STUART
* Dominion Finance: "Performed well over the year and is benefiting from industry consolidation and the flight to quality."
* GPG
* Infratil: "It is a stable performer and it will continue to be so. The acquisition of [transport group] Stagecoach will provide a material boost"
* Mainfreight
* New Zealand Oil & Gas.
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Tomorrow: Which broker's picks have delivered the best returns over the past five years.