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Fears the New Zealand sharemarket is becoming overvalued as it continues last year's run into the new year are overstated, and the market is "far from frothy", Milford Assets portfolio manager Mark Warminger says.
Writing in the fund manager's blog, Mr Warminger says the last few years have been tough for corporate earnings and that even though analysts know earnings have stabilised, they are too reluctant to forecast improved profits as the six-monthly earnings reporting season looms next month.
"We believe that earnings are likely to exceed expectations over the next year as the economic recovery continues and gains pace," he writes. "If that happens, what looks at present like a high average price/earnings ratio for New Zealand shares of around 15.5 times will be somewhat lower."
The average PE ratio for the market over the last decade has been 14.7 times.
"Analysing another valuation metric would suggest the New Zealand equity market is currently fair value on a dividend-yield basis, with the current prospective dividend yield equal to its 20-year average.
"Comparing the equity market dividend yield to current government bond yields would suggest the New Zealand equity market is cheap," Mr Warminger argues, and applies the same logic to other metrics such as equity risk premium and discounted cashflows.
"The current investment climate of low interest rates, low but stable growth and most valuation metrics showing no signs of frothiness argues well for continued gains as earnings improve and the PE multiple expands to reflect the current environment."
Fears of an overheated local equities market followed last year's 25 percent rise in the NZX 50 Index of leading stocks, with the rise continuing in the early part of this year.
The NZX 50 briefly hit a five-year high point of 42204.407 on Monday, in very light trade affected by Auckland and Australia anniversary weekends.