Beware of the sharemarket 'herd effect': Tower

Last updated 16:00 23/01/2013

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A bubble could be starting to form in the New Zealand sharemarket as cashed up investors search for places to park their funds, Tower Investments warns.

At the fund manager's regular quarterly briefing in Auckland today Tower CEO Sam Stubbs said it was seeing the first signs of "irrational exuberance" in the equities market.

Tower held a fundamentally positive view of the financial markets, which were being well supported by "very low interest rates and governments effectively printing money".

But it believed with interest rates staying lower for longer, investors would increasingly move into the share and property markets.

Stubbs said the herd effect was occurring, with people feeling a stock was a good investment just because a lot of people were buying into it,

"People think because it's got a high price it must be high quality - that's not the case," Stubbs said.

"We last saw that with the finance companies. We are starting to see investments which are mutton dressed up like lamb."

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

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

A number of companies trading at that multiple had historically cyclical performances, and "the market is no longer pricing that [in]", he said.

Stubbs said Kiwis had large amounts of cash sitting on deposit, and Tower believed the upcoming SOE listings would be overwhelmed with domestic demand.

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