More investment needed to catch Axa's eye

Company earnings seem to have hit bottom and a pickup is imminent, but fund manager Axa still has less invested in New Zealand than usual and more in Australia.

Australian shares were expected to do better because of greater business investment leading to higher potential economic growth and company profits.

Australia's planned mining investment is huge and includes the A$43 billion (NZ$53b) Gorgon and the A$12b ($14.9b) Pluto LNG projects.

Gains in New Zealand and Australian shares have eased off in the past few months, after a rebound earlier in the year.

Australia has been hit by rising interest rates, and rates are expected to rise in New Zealand, but not till the middle of next year. A stronger currency has also weighed on shares in both countries.

A pick up in New Zealand company profits was expected given a lift in producer price margins and pointers from business confidence surveys, Axa says.

Business confidence broadened beyond construction to agriculture and manufacturing, reflecting higher dairy prices and a stronger Australian economy boosting New Zealand manufacturing exports.

High net migration and a rebound in the housing market was also expected to boost retail.

To match Australia's growth and earnings potential, New Zealand needed to lift business investment and not put more into residential property, Axa head of investment strategy Keith Poore said.

"We feel better (about New Zealand) than we did last quarter, but we would like to see that confidence reflected in investment. Businesses are not investing yet," he said.

Government was spending more on infrastructure like energy projects and roads, but economic growth needed to be self-sustaining, with a turn up in consumption and investment.

Australian shares appeared expensive because of a fall in profits in the past year, but that reflected low commodity contract prices set in the past. A rebound in those prices was a good sign for resource and mining companies in the coming year.

In its latest quarterly outlook, Axa Global Investors said next year should be positive for shares around the world, after the recovery from the global finance crisis.

"The outlook for equities remains positive in 2010, but returns are moving to a lower trajectory," Axa chief economist Bevan Graham said.

Developed markets such as the United States, Britain and Japan were expected to see subdued growth, as people saved more and unemployment stayed up.

The big surprise of 2009 was that those countries were back to good growth by the end of it.

The first half of 2010 looked "reasonably OK" internationally because of the government stimulus, but Axa was more cautious about the second half of next year, which could see the US dipping back into recession. After the government bailouts around the world, governments could need to put up taxes to help balance their books.

Internationally, share values remained "reasonable", and profits were expected to improve.

- © Fairfax NZ News