The World's Best Developed Market Is Now Asia's Most Expensive

As fund manager Mark Williams deliberated from his London office where next to invest, the world’s most remote stock market was just too good to pass up. That’s worrying locals, 11,000 miles away in New Zealand.

The S&P/NZX 50 Index is the world’s best-performing developed stock gauge this year, climbing more than 7 percent to a record after overseas buying of equities jumped 21 percent in 2015. That’s driven stock valuations in the South-Pacific nation close to a record high, leaving them more expensive than anywhere else in the region.

Funds from Henderson Global Investors to Liontrust Asset Management are buying into New Zealand, lured by dividends almost double the global average, rising earnings and expectations the central bank will cut interest rates to maintain growth. Yet with a market cap of about $75 billion, smaller than the publicly traded value of Nike Inc., opportunities are becoming more limited, says Matthew Goodson, an Auckland-based investor.

“We’ve seen significant offshore inflows into larger-cap stocks and that’s driven their valuations to unusually high levels,” Goodson, who helps oversee about $1 billion at Salt Funds Management, said by phone. “It’s swamped the market and it leaves them very vulnerable. We’re somewhat nervous.”

Foreigners now own about one third of New Zealand’s market, about three times the overseas ownership of U.S. equities, according to estimates from brokerage JBWere. Mark Williams, a money manager at Liontrust, is optimistic, given he expects the nation’s central bank will cut its key interest rate from an already record-low 2.25 percent.

While New Zealand accounts for less than 0.1 percent of the MSCI All Country World Index, Williams said he has 4.5 percent of his fund invested in the country. He bought Spark New Zealand Ltd. and Fletcher Building Ltd. in March, attracted by dividend yields of more than 5 percent. Spark, a communications provider, is the largest member by weighting of the S&P/NZX 50 gauge.

“We find plenty of opportunities in New Zealand,” Williams, who helps manage 4.8 billion pounds ($6.7 billion) running an Asian equity-income fund at Liontrust, said by phone from London. “Interest rates remain relatively high, so that could lead to further cuts.”

Foreign inflows in March may have inflated price-earnings multiples on some larger stocks, including Meridian Energy Ltd., said Goodson at Salt Funds. Meridian was added to the FTSE All-World Index last month, requiring money managers that track the benchmark to buy the shares of the hydro-electric power generator.

Exaggerated Moves

The S&P/NZX 50 index, which includes returns from reinvested dividends, trades at 19.4 times estimated earnings, versus an average valuation of 16 over the past 10 years. The Standard & Poor’s 500 Index and the Stoxx Europe 600 Index trade at 17.5 and 15.4 times, respectively. The NZX 50 closed 0.7 percent higher in Wellington on Thursday.

“It’s a small market and it doesn’t take much to move it,” said Chris Green, the Auckland-based director of economics and strategy at First NZ Capital Group Ltd. “There’s limited domestic sellers and plenty of foreign buyers. At the point the music stops, it’s a small door as well, so that tends to exaggerate moves on the way up and on the way down.”

Mark Lister is cutting positions in New Zealand equities and looking to cheaper markets, including parts of Europe. The head of private wealth research at Craigs Investment Partners in Wellington, which manages about $7.2 billion, says valuations are pricey and profit growth may fail to deliver.

Earnings-per-share on the S&P/NZX 50 index are forecast to expand 9 percent this year, compared with the 4.9 percent growth expected for the MSCI Asia Pacific Index, according to analysts’ estimates compiled by Bloomberg.

“It’s really hard to find value in the local market after the run that we’ve had,” said Lister. “We are actively taking profit in some sectors and some stocks and adding to our international positions in markets that offer better value.”

Foreigners owned NZ$33.5 billion ($23 billion) of New Zealand-listed shares as of Dec. 31, compared with NZ$27.8 billion at the end of 2014, according to statistics office data compiled by First NZ Capital. The average dividend yield on the S&P/NZX 50 index is 4.6 percent, compared with 2.7 percent on the MSCI World Index.

Back in London, Michael Kerley has his eye on a New Zealand target. The fund manager at Henderson Global owns Spark stock and is considering buying Skycity Entertainment Group Ltd., a casino and hotel operator.

“It’s difficult to ignore companies with such high yields,” said Kerley, who runs Asian equities for Henderson Global, which has about $120 billion of assets under management. “It’s got to be a market we keep looking at. The yields are so high.”