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.”
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