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Bargain or long shot? The sharemarket has never been harder to read

Catherine Harris12:40, Jun 03 2020


ANALYSIS: Is the sharemarket getting ahead of reality? It's a question for Kiwi investors as optimism returns to the trading floor.


The NZX has recovered strongly from a 30 per cent plunge in March, clawing back 27 per cent over the following month.


However, it's been largely treading water since, investors on the alert in case the rollercoaster ride is repeated.


Wall St has enjoyed a similar rebound and is now back to levels last seen on March 6.

The NZX's recovery has been accompanied by a flood of small trades, a sign mum and dad investors and independent brokers are getting back in the game.


Matthew Goodson, of Salt Funds Management, believes it's ''FOMO,'' the fear of missing out, but he's not quite as bullish.


''It's quite staggering we're actually back at levels which we saw in the second half of last year.''


Other fund managers share his wariness. Milford Asset Management, a Kiwisaver and general investment fund company, holds the view that the world is in the early stages of this outbreak and economic activity will be impaired for a long time.


While cheap shares were one reason for the NZX rebound, it always has an eye on Wall St, which it tends to reflect with fewer extremes.


Nevertheless, New Zealand still marches to its own beat.


''We don't have any material exposure to the banking sector or the financial sector, we don't have a large exposure to energy stocks and resources as well,'' Milford's New Zealand equities portfolio manager Sam Trethewey says.


''Those three sectors have been underperforming quite substantially in the Covid pullback and that's why the New Zealand sharemarket held up a lot better than other parts of the world.''


Perhaps the biggest factor underpinning the confidence on both Wall St and the NZX right now is the early decision by central banks - including our own - to print money.


Swift action by the central banks to keep cash flowing by buying back government bonds means the investors selling them have money to reinvest elsewhere.


''All around the world we've seen this battle, trying to weigh up incredibly cheap or free money with the question of solvency and earnings fundamentals, and can a company see it through to the other side?','' Goodson says.


And with bank returns looking sickly, Trethewey says many investors at the moment seem content to look through the near-term pain.


''People are thinking about less of what the next six months, 12 months look like for New Zealand companies, because we know that will be pretty weak in a lot of cases, and more about what does this business look like in the medium-term,'' he says.


''Are we comfortable that it is still going to earn attractive profits and pay attractive dividends or appreciate in value over that medium term? That's what the market has been a lot more comfortable with over April.''


Success for many small investors who plunged into the sharemarket over March and April may come down to the stock they chose.


''To break the market down into three buckets, 25 per cent are companies that are directly exposed to the economy or tourism,'' says Trethewey, ''and that's where it's very hard to get confidence around what their outlook is.''


The next bucket are the growth names that many are familiar with: a2 Milk, Fisher and Paykel Healthcare, PushPay and some of the other tech stocks.


''That's about a third of the market and they haven't really changed,'' says Trethewey. ''They're still likely to grow earnings in the years ahead and, I think, remain an attractive place to be for investors.''


The rest of the market is ''defensive,'' stocks primarily held for their dividends.

''They're very sensitive to what interest rates do, so that's the property sector, the telco names, the gen-tailers,'' says Trethewey.


However, there's no denying the challenging times ahead. During March and April there were some wild moments. Oil prices gyrated wildly, jobless figures soared and companies daily withdrew or revised their profit forecasts.


United States unemployment in April has had its biggest monthly jump since the Great Depression.


So while experts say world sharemarkets was definitely due a breather, there's no guarantee all the bad news has been priced in.


In Goodson's opinion, the market had ''never been more expensive,'' based on one-year forward multiples.


''You have this classic battle between central bank liquidity and fundamentals, and at the moment, central bank liquidity is most certainly winning.''


His advice to investors is to ''play the long game,'' and consider the age-old technique of ''dollar-cost averaging,'' drip-feeding regularly into the sharemarket - if they can afford to.

The other risk for investors is that, especially in extraordinary times, the ground rules may change.


As people think though how the Government's bailouts will be repaid, talk is turning again to capital gains or wealth taxes, which could have a chilling effect on the sharemarket.

At the end of March, former Prime Minister Sir Bill English advised clients of Jarden Investments that the sharemarket shrugged off reality at its peril.


The shutdown was caused by real world issues that could not just be talked up, and there was a danger of political backlash.


'Essentially, I was saying the combination of rising sharemarkets and widespread unemployment would create divisions around wealth,'' he told Stuff.


Two months later, he says he still holds those views, but a clearer picture of the sharemarket is forming.


''The indices are driven by the bigger, strong, more digital and brand oriented companies ... and if you're not in that group than you are down, but you're still being carried along by this flood of cash driven by central banks.


''So in general, yes, but there's a bit more nuance now where the strong are getting stronger and the weak dropping off a bit''.


New investors will be hoping that English is overly pessimistic and that the bounce-back is deserved.


Oil prices have now almost doubled from levels around US$20/barrel and real time activity has begun to improve.


In a note on Wednesday, ASB economist Mike Jones said card spending, electricity demand and traffic volumes were turning up, suggesting that New Zealand's economic activity, ''while still miles below ‘trend’, may be bouncing back a little earlier than we expected''.


''For now, investors appear content to play up the positives.''


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