With the the NZX 50 Index having chalked up a stellar run over the past six months to set an all-time high, professional investors say listed firms need to deliver real earnings growth to sustain momentum.
The benchmark index closed at 4366.57 yesterday, its highest level since early 2003, when the NZX switched from a mutual exchange to a stock exchange format.
Over the 10 years, the NZX 50 Index has gained 120 per cent, and recovered 82 per cent of its value since the depths of the global financial crisis in February 2009.
Now the Kiwi sharemarket is heading into uncharted waters, and professional investors say firms will need to deliver real growth if the stocks are to produce further gains.
"It is really now driven by the ability to generate revenue and sales," said Craig Brown, an investment analyst at OnePath.
"Given we've been through a reasonably tough time, and businesses have focused on their cost bases, we would expect to see some operating leverage."
As it stands, stocks are seen as fairly priced, with average price/ earnings ratios sitting at a multiple of 15.5, near the top of the 13.5 to 16.5 historical band. That premium has been justified by the higher yields offered in the sharemarket, with dividend returns of between 5 and 6 per cent a year luring some of the $112 billion sitting in retail bank accounts into equities.
Professional investors say that companies will have to improve their performance in future to continue enticing these funds into the sharemarket to drive share-price growth.
However, that is set against a tough economic backdrop.
"It's fair to says it's still a challenging environment for companies with sluggish economic activity and the strong New Zealand dollar," said Guy Elliffe, head of equities at AMP Capital New Zealand.
He also flagged the impact of a new tranche of companies listing on the market as a possible negative, with the floats of Mighty River Power, Genesis Energy, Meridian Energy and potentially Z-Energy swamping investor demand in the short term.
The New Zealand market also faces headwinds from the fragile global economy, with budgetary deadlocks in the US, slowing growth in China, and a flare-up of Europe's ongoing sovereign debt crisis potentially waiting in the wings. Still, investors say there are pockets of value out there, even at these fairly priced levels.
Mark Lister, head of private wealth research at Craigs Investment Partners, said New Zealand corporate balance sheets were sitting with low levels of debt and many firms were exposed to markets above GDP-growth rates, such as construction, commercial property and aged care.
"Because everything has gone up a bit you have to work harder for opportunities," he said.
Specifically, he favours Fletcher Building, Sky Network Television, Delegat's, Summerset and A2 Corp.