Are N.Z. Equities too expensive ?

**Beagle** · 29-01-2018, 07:58 AM

https://www.goodreturns.co.nz/articl...9+January+2018

Good fodder for debate here. I suspect like all statistics it depends upon how you interpret the numbers and the truth is probably somewhere in the middle. It one assumes the forward PE for the market as a whole is about 21 and the average for the last decade is just 16 is another 5 PE warranted with ultra low interest rates and a reasonable growth outlook ? What if interest rates rise in 2018 and 2019 ?

My take on this.
- Stellar growth companies like ATM FPH Synlait e.t.c. are skewing the data a bit.
- Some other large companies with modest growth prospects like POT and AIA are over priced and are impacting the data further.
- Safe large utility companies like all the gentailiers are trading on yield derived from free cash flow and the high PE's of that's sector are impacting the data even further.
- With a market average forward PE of 16 for the last decade in mind I think if you can find companies on a forward PE of less than 18 with reasonable growth prospects that could be one quite useful filter to apply as a stock selection marker. If sound growth prospects come at a PE of less than 16 it might be time to open the cheque book in a meaningful way.
- Some of the retirement stocks for example meet that criteria very nicely and have prevailing tailwinds for the next ~ 25 years.
- On the other hand holding stocks just for yield might be a little riskier than it was in years past as we enter a rising interest rate environment.
- Some diversification overseas seems to make good common sense with the currency where it now is.

**fish** · 29-01-2018, 09:13 AM

Thanks for that post Beagle
You have given a lot of useful advice over the years

**Dust** · 29-01-2018, 09:24 AM

Oh yeah, no doubt equities are overvalued everywhere at the mo cept for most of the emerging markets.

My take on NZ is the lack of security selections, to gain any sort of exposure in our market you've only got the handful to pick from so of course everything is overbought, like you said even the ones with modest growth are overpriced. I'm sure alot of people have resorted to buying the losers to gamble on any sort of value left in the market.

...and I'm picking it's going to get worse...when youve got more delistings than IPOs in a thriving global economy

**iceman** · 29-01-2018, 09:31 AM

Good points Beagle and no doubt a question we are all grappling with.
In the decade ending 31 December just gone, the NZX index rose 108%, NZ Bonds 95% and Auckland house prices 95%. So we've had a good run overall.

One issue that needs to be taken into account is the huge amount of bonds reaching maturity and redemption in NZ, an estimate $ 6-7 Billion in the first half of this year. It looks unlikely new issues will be but a small fraction of that. In the current low interest environment, where will this large amount of money go.
I suggest it may underpin the performance of good divie paying stocks for a while yet

**Dassets** · 29-01-2018, 10:07 AM

Back in the day I did some regression analysis on the NZ market. I collected data on interest rates, PEs , inflation, index levels quaterly for about 50 years. This was in the early 90s. What I found was a strong and stat significant relationship between PE and interest rates/ inflation I demonstrated that a PE band existed at certain inflation rates and implicitly interest rates. The band allowed for a bunch of other factors. From memory i would expect a band of 19 to 23x at current inflation. Yes there are a bunch of other issues such as pe calculation etc. But with over 200 points in each series it was pretty good. Never seen that analysis replicated in nz btw. But hey I did 3 stahe dividend discount models for the whole market and used matrix algebra to break down complex ownership structures back then too.

**Sideshow Bob** · 29-01-2018, 01:45 PM

All good points.

I would be interested in to what degree KiwiSaver is pushing NZ share/bond markets along. Averages about $450m per month going into providers ($5.4b/pa), and would expect still want a good portion in NZD investment. That flow is going to continue and should continue to grow.

**macduffy** · 29-01-2018, 02:40 PM

Good discussion, all!

Given the strong demand for NZ equities, one wonders why there's such a dearth of new listings - like, none since OCA last year - or, are there promotors, brokers and underwriters working furiously in back offices, that we don't know about? (OK, I know that's unlikely.)

**minimoke** · 29-01-2018, 02:51 PM

Originally Posted by Sideshow Bob

All good points.

I would be interested in to what degree KiwiSaver is pushing NZ share/bond markets along. Averages about $450m per month going into providers ($5.4b/pa), and would expect still want a good portion in NZD investment. That flow is going to continue and should continue to grow.

in 2-19 another $1b will go into NZ Super fund increasing to $2.5b in 2022. Total contributed under the new labour govt approx $8b over 5 years

**Sideshow Bob** · 29-01-2018, 04:24 PM

Originally Posted by macduffy

Good discussion, all!

Given the strong demand for NZ equities, one wonders why there's such a dearth of new listings - like, none since OCA last year - or, are there promotors, brokers and underwriters working furiously in back offices, that we don't know about? (OK, I know that's unlikely.)

Just had a look under new listings on the NZX website, and there were none at all!