Year tipped for taking a punt

Share-shy investors might want to consider a punt on the sharemarket in 2010, with brokers forecasting total investment returns to top 20 per cent as earnings relief and valuation support kick in.

For the first time in several years, brokers' expectations are for company earnings to have a positive influence on market returns as New Zealand emerges from a deep recession and economic growth swings into positive territory.

While global markets have generally rebounded to levels that historically would suggest a sideways bias for the first part of 2010, Forsyth Barr head of research Rob Mercer says investors should look beyond any continuing near-term earnings risk.

"We believe the focus should and will be on mid-cycle earnings, which our analysis suggests should support a target gross return for the New Zealand sharemarket of more than 20 per cent over the next 18 months," Mercer said.

Since the absolute lows of last March, when the market was at its cheapest, the NZX 50 gross index has rebounded strongly – finishing 2009 up 19 per cent – eliminating the broad undervaluation across the market.

This environment, says Mercer, was ripe for stock-picking, with valuations, earnings growth, and fundamental disciplines likely to serve equity investors well.

"The extent of forecast downgrades through the downturn was dramatic and since then we have seen consistent upgrades in most markets – though little thus far in New Zealand. Earnings forecasts should grow significantly as the real economy progresses."

With the global economy already in recovery mode senior analysts at Goldman Sachs JBWere said investors had already paid for "emergence from recession" and, as such, valuation was "no longer an ubiquitous tailwind".

As financial markets normalised, themes that had taken a back seat during the global financial crisis, such as merger and acquisition activity, would likely re-emerge, Goldman Sachs' Bernard Doyle and Marcus Curley said.

"Against this backdrop we expect New Zealand equities to push higher," they said, in picking a total return for the NZX 50 through 2010 of 20 per cent, driven in no small part by improved valuations and dividend yields.

Among the key themes identified by Goldman Sachs as having the potential to be influential in driving stock returns were companies with exposure to Australia, which enabled Kiwi investors to tap into a more powerful, cyclical recovery.

Companies that had completed major capital expenditure investments to boost capacity and performance, meanwhile, would be able to grow their margins against a backdrop of expanding economic activity.

Looking forward, the lull in global merger and acquisition activity would likely lift in 2010, driven by healthier balance sheets, greater availability of finance, improved valuation levels and increased confidence at board level.

And with brokers backing the New Zealand dollar to depreciate over the next 12 months, albeit not dramatically, companies that benefited from a weakness in the kiwi were considered worthy of consideration.