'Equity markets still the horse to back'

The New Zealand sharemarket is still a better bet than cash or bonds, despite it appearing to have peaked at the beginning of the year, says AMP Capital's head of investment strategy.

2010 began on a weak note, with a significant reversal in share price improvement, Jason Wong said at AMP Capital's quarterly briefing today.

"Global sharemarkets have been overdue for a correction so we don't read too much into the recent fall."

The strong returns of last year were unlikely to be repeated but shares could do much better over the rest of the year than the prospective return of 4 to 5 percent on low risk assets like cash and government stock, he said.

The NZX-50 index has slipped 7.3 percent, from 3313 in early January to around 3076 today, meaning the "sweet spot" for equities was now clearly over since the market enjoyed its rally since March last year, even though the economy was still early into the recovery phase, he said.

The latest dip meant shares were going through a healthy correction, he said.

AMP Capital started buying equities aggressively in its balanced fund, lifting equities from 46 percent of the fund in March to 58 percent in September last year. However, that aggressive weighting had now ended.

"We are now allowing our equity position to drift lower so effectively we are taking profits.

"However, we are not in a rush to go underweight despite this market correction, we think it's a healthy correction and we are going to sit it out.

"Longer term we are quite bearish on bonds but shorter term we think, with very steep yield curve, inflation well under control and with policy rates still low, there's no real rush to sell bonds at the moment."

Mr Wong said the global economic recovery would continue, albeit uneven in places, and New Zealand's recovery would be in line with our major trading partners, riding on the coat tails of a global economic recovery, at about 3 to 4 percent growth.

Mr Wong said China tightened its monetary policy earlier than expected, but China still had low interest rates of about 1.5 percent and economic growth of about 10 percent.

"We would be more worried if the central bank or authorities weren't looking into this excessive lending, because that's obviously going to create a bubble."

Industrial production indices were rising for the United States, Japan, Europe, China, India, Russia and Brazil, with the emerging markets growing stronger than the developed markets.

"The question is, how sustainable is it?"

The recovery had been driven by easy monetary and fiscal policy, not consumer spending, he said.

"We really need to see domestic demand pick up because we know monetary stimulus and fiscal stimulus aren't going to be around forever."

Mr Wong said the major countries would not reduce financial stimulus, and raise official cash rates, until later in the year.

New Zealand would raise its current historic low OCR of 2.5 percent probably by the middle of the year.

The risk for the Reserve Bank was that if it removed the stimulus too late it could create a boom and bust cycle, he said.

The housing market was bouncing off its lows but there were question marks about how strong it was.

"There's no real demand for credit at the moment. People have been spending beyond their means for quite some time now and are taking the opportunity to repay debt."

Banks were also tightening up their lending criteria, which meant it was unlikely there would be another credit-fuelled boom, he said.

- NZPA