NZ beats the market big boys

By ELLEN READ

The sharemarket deserves eight out of 10 for its performance in the first half of the year, say brokers and analysts.

The NZSE Top-40 gross index has gained 3.78 per cent so far this year, outperforming most major boards, including the Dow Jones, S&P/ASX 200 and the FTSE 100.

Supporting the performance are a strong economy, a rising dollar and isolation from the corporate scandals rocking the United States.

Local equities began the year well but the rally fizzled in early February and some of the early gains were eroded.

That occurred against the backdrop of a good earnings reporting season - the best for some time, says Jason Wong, First NZ Capital's director of economics and strategy.

Wong said the huge outperformance of New Zealand equities reflected several factors.

They included the different stages of the earnings cycle, with New Zealand companies one year into a recovery while global earnings were still weak; the appreciating New Zealand dollar, which had encouraged increased overseas fund flows; the preference for "value" over "growth" companies; and the lack of IT exposure in New Zealand.

Air New Zealand and BIL International shone, booking returns of 89 per cent and 120 per cent respectively, Wong said.

At the other end of the scale, Fisher & Paykel Healthcare and Baycorp Advantage were down 50 per cent and 45 per cent respectively, with potential earning risks weighing on investor confidence.

Within New Zealand, medium-sized companies shone, and the mid-cap gross index rose 7.77 per cent.

Small companies gained more modestly (the small-cap index was up 1.96 per cent) and the New Capital Market proved a graveyard for investor cash, falling 11.07 per cent.

Telecom, the country's largest listed company, tempered the NZSE-40 rise. The company makes up almost a quarter of the index and although it has strongly outperformed global telcos, it has weighed on the local rise.

That has masked outstanding gains by the likes of Auckland International Airport (up 24 per cent), Carter Holt Harvey (18 per cent), The Warehouse (13.8 per cent) and Sky Television (11.4 per cent).

The rising dollar - up 17 per cent against the US currency this year - has boosted local equities as overseas investors take advantage of the cherry on top of sharemarket returns.

"Whichever way you cut it, it's a superstar performance," said Macquarie equities analyst Arthur Lim.



Wong is more reserved. He said the 4 per cent gain so far this year was below what a typical investor would expect, taking account of equity risk.

But the context of the rise was the most interesting point, he said - that New Zealand had escaped the bloodbath in many global equity markets for what looked like the second year running.

NZSE chairman Simon Allen said in relative terms the past six months was an extremely good performance.

"It's been a very difficult period for many of the world's major markets," he said.

Allen was optimistic about the next six months. The new listing pipeline was strong, he said, a new chief executive was in place and the exchange was moving towards demutualising and listing late this year or early next year.

The NZSE's new chief executive officer, Mark Weldon, took up the position last month and has a list of projects.

They include reshaping the present three capital markets - the exchange's main board, the New Capital Market and the grey market - into a more integrated structure; marketing the benefits of listing to large private companies and fast-growing start-ups; educating New Zealanders on the benefits of investing in equities; and telling overseas investors what is happening here.

John Cobb, manager of private stockbroking for JBWere, agreed with Allen's optimism.

He singled out retail and port companies for special praise - the former a sign of the buoyant economy and the latter popular as investors looked to safe, solid stocks.

Trading for the second half-year begins today and the next six months should continue to bring good times for local equities, although the shine may dull a little.

Troubled overseas markets are reflecting worries about corporate scandal and the Middle East conflict rather than fundamentals.

"We believe somewhere along the lines in the next six months the markets will realise that and start re-rating some of the markets," Lim said.

Wong does not believe global equities will recover in a meaningful way until investors are convinced that an economic recovery will be sustained and that a genuine lift in earnings is in train.

"That could still be a couple of months away, or longer," he said.

"Short term, we still prefer New Zealand equities to global equities but over the medium term we see the outlook as more balanced."