Having risen 80% since March 2009, the NZX50 is now back at its all-time high from May 2007. We look at some key reasons why today's market is fundamentally different to the exuberance of 2007.
- NZ shares aren't as expensive as they were in 2007. The generally accepted valuation measure for shares is the price-earnings (PE) ratio, which simply compares the price of something with how much earnings it generates. In May 2007, NZ shares were trading at a PE ratio of 16.9, 21 per cent above the 20-year average of 14.0. Today, NZ shares are trading at 15.7. This is still 12 per cent above the 20-year average, so while you could argue that they are slightly expensive; we haven't got near the heights of 2007.
- Unlike 2007, dividend yields on shares are well above bank deposit rates. Back then, a six-month term at the bank was paying 7.5 per cent, while NZ shares offered a gross dividend yield of 4.9 per cent. Today, the same term deposit pays under 4 per cent while NZ shares today are paying 5.8 per cent. With such a strong investor focus on income and against the backdrop of low interest rates, it's very hard to argue that shares look overpriced when measured on dividend yields.
- Earnings forecasts are realistic, rather than optimistic. In May 2007, analysts were expecting NZ companies to grow their earnings by 11.4 per cent over the following 12 months, then again by 11.5 per cent in the 12 months after that. Those expectations proved far too hopeful, as about 40% of NZ's listed companies saw earnings fall over the next year, rather than rise and the median increase was barely 3 per cent. Today, we expect earnings to grow by about 10 per cent this year and next year. Having just seen some excellent results from the likes of Summerset, Auckland Airport, Delegats and Sky TV, this now seems realistic.
- The economy is growing (albeit slowly), rather than shrinking. Our companies and our sharemarket can only be strong if our economy is strong. While things still feel tough in many ways, we're in a lot better shape than we were in 2007. When our market last reached this level, we were facing a 0.6 per cent contraction in GDP over the coming year, and a 2.5 per cent contraction in the 12 months after that. In 2013 and 2014 we expect growth of 2-3 per cent. While this is partly due to the Canterbury rebuild, it's much easier for companies to succeed when an economy is stable or growing, rather than shrinking.
- Company debt levels are lower today. Whether it's governments, households or corporates, having too much debt was a huge part of the problems in 2007. So it's comforting to see that, on average, our listed companies have lower debt today than they did back then. The average level of gearing today is 27.5 per cent, compared with 31.1 per cent in 2007.
- Finally, despite a good performance from shares in recent years we haven't seen the "herd" flock to shares as much as some might think. According to Reserve Bank data, we collectively have $48.6b invested in NZ direct shares and managed funds, 8.3 per cent less than in the middle of 2007. In NZ dollar deposits with the banks we currently have a whopping $108b. This is a 52.6 per cent increase on mid-2007 levels. For those wondering if there's enough demand out there for new companies coming to market, that last statistic is probably your answer.
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.
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