NZ equities over valued, says Tower

00:22, Jan 24 2013
market bubble
INVESTORS BEWARE: Tower is seeing the first signs of "irrational exuberance" in the equities market, with investors paying too much for some stocks.

A bubble could be forming in the New Zealand sharemarket as low interest rates drive cashed-up Kiwis in the direction of stocks, Tower Investments has warned, but other market commentators aren't so sure.

Tower chief executive Sam Stubbs said the fund manager was seeing the first signs of "irrational exuberance" in the equities market, with investors paying too much for some stocks.

Kiwis had lots of cash on deposit, and with interest rates staying low they were increasingly moving into shares and property in search of yields, he said.

People were believing a stock was a good investment just because a lot of others were buying into it. "People think because it's got a high price it must be high quality - that's not the case.

"We are starting to see investments which are mutton dressed up like lamb."

Tower's equities portfolio manager, Stephen Bennie, said half the companies on the NZX were now trading at a multiple of 15 times earnings, which should indicate that they were quality investments.


"We believe there is a far shorter list than 30 true quality companies in New Zealand," he said.

Fletcher Building had been a strong performer and had gone significantly above a multiple of 15. "The reality is it's a much more cyclical company than that. So that's an example, a company that's cyclical and the market is no longer pricing that [in]."

The NZX shows Fletcher Building with a P/E (price to earnings) ratio of 34.17. Its share price has risen 50 per cent in the past 12 months.

Restaurant Brands was another example, Bennie said. "I was surprised to see that tick into the 15-times multiple."

The NZX shows Restaurant Brands' P/E is 17.35. Its shares have also risen 50 per cent in the past year.

David Price, head of institutional broking at Forsyth Barr, said a multiple of 15 was towards the top end of his firm's buy/sell band, but he wouldn't go as far as to say there was a bubble forming.

"We certainly have seen the market have a good lift even though we haven't seen an improvement in earnings. It's just the weight of money that's stopped [it] from correcting back."

However, with many companies about to report for the six months to December, "that may come into question once we get this next lot of results".

Mark Lister, head of research at Craigs Investment Partners, also disagreed there was a bubble. "A bubble means things have got wildly expensive."

The average New Zealand P/E was currently about 15.4, and that was only 10 per cent above the 20-year average of 14, he said.

"We're certainly not selling our clients out of the New Zealand market. You don't sell things just because they've had a good run."

However, it was getting harder to find buying opportunities and, like Tower, Craigs was increasingly looking to Australian equities, he said.

JB Were strategist Bernard Doyle said it was premature to be calling the market's performance a bubble. "The market can put on probably another 10 per cent fairly easily for the next 12 months. "I do agree in as much as the market now requires good earnings to fill where prices have run to."

Fletcher Building's performance was based on widespread anticipation of a building recovery in New Zealand and Australia.

"If that happens it will justify the movement in price. If it doesn't happen, we've got a problem."