Turn of the tide

By Rebecca Macfie

Tuesday 17th January 2006

Lloyd Christie has a few simple principles that guide him in his share-market investments. "Go for companies with reasonable dividends, reasonable growth, and let the power of compounding take its course," says the 75-year-old Tauranga investor.

And take the long view. Investing is a business, not a gamble, and if you want to get decent returns, buy solid companies with a proven growth record over at least five years. "I'm for steady and solid. If I see a company whose share price is booming I put my running shoes on and head in the other direction."

Oh, and another thing. Be prepared to run against the tide. If everyone else is selling, there's a good chance it might be time to buy. Like in October this year, when the market faltered, falling 4.6% in what's generally referred to in the trade as a 'correction'.

"I'm quite unfazed by the drop," says Christie. "When you get ab-normal growth you know there has to be a correction. And it also provides good buying opportunities."

Whether the performance of the New Zealand sharemarket since 2003 has amounted to 'abnormal' growth is a moot point, but there's no doubt it's been impressive and just reward for committed long-term investors like Christie.

Arthur Lim, investment director at Macquarie Equities, rattles off a few stats to underscore just how well it has performed. Since March 2003, it's gone up by 75%. Take into account the effect of the appreciating dollar over that same period and the figures are even more impressive. An investor putting US dollars into the New Zealand sharemarket over that time would have made a 100% return, says Lim.

By contrast, the Dow Jones index has gone up by only 36% over the same period, and the Japanese Nikkei 74%.

Lim, like others in the market, believes the strong showing of New Zealand shares reflects the good shape New Zealand companies were in by the time the economy went into its recent strong growth phase. "The corporate sector had gone through severe and constructive consolidation, particularly since the Asian crisis when -interest rates had gone through the roof and the economy crunched. So they went into the economic recovery of 2002 with strong balance sheets and good management."

And while a company like Hellaby Holdings - which has investments across a range of New Zealand's economic sectors - has been hammered by the sharemarket this year, falling from $6.45 in early 2005 to around $4.75, Lim again urges us to look at the long-term performance: back in late 2000, he says, Hellaby was at just $1.75. Ditto Steel and Tube, whose share price has also been hit this year, but which is up 200% since 2000.

On top of long-term gains like these, New Zealand companies have been paying pretty good dividends - an average of 7-7.5% according to Chris Timms of sharebroker Greenslades. "I would say anyone who has stayed in the market and stayed with quality has done quite well."

And there's a surprising degree of unanimity among the share-broking firms as to what counts as "quality": Fletcher Building, Freightways, Mainfreight, Ryman Healthcare, Pumpkin Patch and Waste Management are among those widely cited as having commanding positions in strong markets, convincing growth strategies and sound management.

But if the New Zealand sharemarket's performance since early 2003 has been stellar, it's not so flash if you look only at the last year. Since the start of 2005 it's added only 7.5%, and year-to-date comparisons with other world sharemarkets show New Zealand well down the list, with only four countries doing worse.

Time for flight? Lim doesn't think so. "We don't believe in putting up a wholesale warning sign over the New Zealand economy. There are stocks in New Zealand that can do well in the environment we are moving into, including companies that will do well out of the growth of China and India, and who will benefit when the New Zealand dollar falls - and by hook or by crook that has to happen."

But many broking houses are advising clients to shift more of their investments into offshore markets. One of the most bearish is Jason Wong, First NZ Capital's strategist: "My advice is to shift all your money overseas."

He suggests investors take advantage of the high dollar to buy overseas stocks which are relatively cheap compared with New Zealand stocks, then reap the currency gain when the New Zealand dollar inevitably falls.

Bernard Doyle, analyst at Goldman Sachs JB Were, argues New Zealand shares are relatively over-valued given the clouds gathering over the local economy. With net migration falling from around 40,000 in 2003 to 6,400 in 2005, the high dollar "hollowing out" the export sector, and interest rates still very high, the outlook is for much slower growth (he's picking 1.5% GDP growth next year). But he believes these factors have not yet been fully priced into share values.

"So our concern is that we have a rather expensive market against a background of concern about the growth of the economy."

Short of shifting more money into overseas markets Doyle is favouring "defensive" local stocks providing essential services that are less likely to be affected by a downturn - the likes of Auckland International Airport, Contact Energy, Freightways and insurance company Axa.

But while Doyle sees much tougher economic times ahead, he also expresses a fundamental optimism about the state of the New Zealand sharemarket. "In the past New Zealand used to trade at a 30% discount to world markets and now we're trading at a premium. Part of that is over-valuation, but one of the good things about the sustained growth and market performance that we've seen is an appreciation from offshore investors about the quality of stocks on offer in this market. And that's about quality of management, strong balance sheets and good governance. And I don't think we'll lose that and see New Zealand going back to trading at a raging discount."

At Forsyth Barr, head of research Rob Mercer sees the opportunity for savvy investors to capture the benefits flowing from changing economic influences. When the New Zealand dollar eventually starts to fall (and he's picking US$0.60 by the end of next year) the pressure will start to come off exporters. "We like Fisher & Paykel Appliances because of that. Their short-term earnings are under pressure but their long-term story is good." He likes the look of Tourism Holdings, Air New Zealand and Skellmax, for similar reasons.

And, like others, Mercer is pushing for investors to increase their weighting of overseas shares. With offshore markets now outperforming New Zealand and the Kiwi dollar likely to fall, diversifying your holdings in offshore equities makes sense, he argues.

Still, you won't find Lloyd Christie switching into overseas equities, even if all the advisors think it's wise. Given the effect of double taxation on overseas investments, and the fact he would be investing in companies he didn't know well, he doubts whether it would be a successful strategy for him.
And remember one of Christie's key tenets is, "be prepared to run against the tide".

"Investing isn't a fashion business. You've got to develop your own strategy and principles. And if you don't know what your own thinking is, how do you know when your investment doesn't measure up any more?" Now there's a hot tip.

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