However, she expected earnings revisions to turn positive throughout this year, with forecast market earnings back to trend by the middle of 2012.
"The New Zealand market remains slightly cheap on the key valuation metrics of price-earnings ratio and price to valuation."
Investors should look past the forthcoming reporting season due to start early next month, she said.
The early signs were that earnings were still soft and near-term earnings would remain relatively subdued.
With substantial 2011 full-year earnings growth looking unlikely, the basis for projecting double-digit returns (15% to 20%) for the New Zealand equity market in the calendar year was:
• New Zealand market dividend gross yield of 7.5%.
• Earnings growth of 10% for 2012, bringing the market closer to mid-cycle earnings.
• The 12-month forward market price-earnings ratio holding around its current level of 13.3 times.
"We see those assumptions as being relatively conservative but reflective of an economic recovery that is gradual rather than rapid," Ms Kinnaird said.
Last year, the United States and United Kingdom markets staged "solid rallies", up 13% and 9% respectively. Australia, New Zealand, Japan and the European markets were more muted, mostly posting flat-to-low single-figure gains.
In the year, the NZX-50 capital index fell 2.7% and the gross index rose 2.4%.
The low point in global markets during the global financial crisis was March 2009.
"The recovery since that point has been the strongest on record following a significant global downturn."
Internationally, forecast earnings continued to rise in 2010, although at a slower rate than through 2009, she said.
Forsyth Barr estimated forecast earnings in most major markets were now back to trend, despite economic growth still languishing at lower-than-normal levels.
It was unclear how much of the earnings and market recoveries were due to government liquidity injections. The impact of the withdrawal of stimulus packages in the next one to two years was a risk to equity market returns, Ms Kinnaird said.
For most markets, earnings downgrades followed the global financial crisis stabilisation. Since then, there had been substantial upgrades in most major markets but little so far in New Zealand.
Upgrades in the UK, Australia and the US probably got ahead of reality through the first part of 2010 and the flatter profile since then implied downgrades.
"We estimate forecast earnings in most major markets are now back to trend, despite economic growth still languishing at lower-than-normal growth levels."
Forsyth Barr had three core themes to its portfolio allocation, with the majority of stocks in the first two - stocks with positive earnings momentum and those seen as good-value defensive plays.
The third theme, deep value recovery stories, was higher risk and those stocks should be a smaller component of any portfolio, Ms Kinnaird said.
Ms Kinnaird gave her recommendations for the three categories.
Positive earnings momentum:
Air New Zealand had "flown" through the last couple of years in great shape, both operationally and financially. Forsyth Barr had a favourable earnings outlook due to the increase in Air NZ's underlying yields, the financial benefits of the 2011 Rugby World Cup, the implementation and expansion capacity from the new aircraft being introduced between now and August and the company's superior product servicing the transtasman market.
Delegat's Group's key competitive advantage and relative strength over other wine-exporting companies was it had a single-brand (Oyster Bay) export wine strategy. That had enabled it to maintain relatively stable export prices, in local dollar terms, in its key export markets of the UK, Australia, Canada and the US.
Cavotec MSL Holdings was the result of a merger between Mooring Systems Ltd and Cavotec Group Holdings. The merged group had seen an improvement in new orders recently and was upbeat about an earnings recovery in the second half of this financial year.
The group had key themes working in its favour, such as increasing environmental focus, demand for efficiency improvements at ports and airports and exposure to the Middle East and China.
Fletcher Building had launched a full takeover bid for the Crane Group at an equivalent price of $A9.35 ($NZ12.10) per Crane share. The takeover bid appeared to be fully priced but Forsyth Barr was comfortable with the merits of the combined group and the value Fletcher Building could bring, particularly to Crane's underperforming New Zealand operations. The outlook for building activity in the next three to five years was positive.
Skellerup developed, marketed and distributed technical polymer products for specialist industrial and agricultural applications. Despite uncertain global economic conditions, the company's earnings momentum would be sustained by new products.
Core defensive stocks:
Auckland International Airport was a sound investment story, given its control of New Zealand's major gateway and New Zealand's positive longer-term tourism outlook. While the near term had challenges, the tourism sector was expected to recover during the next 12 months.
Fisher and Paykel Healthcare had a strong growth outlook in both its businesses - solid underlying market growth in obstructive sleep apnoea products along with expansion into new segments.
Freightways was a well-managed company, operating with a strong position in an attractive duopoly market structure. Earnings had been affected by the recession but had still proven to be relatively defensive.
Infratil, a utility investor, had reorganised its investments in the past year, divesting about $400 million of non-strategic investments and reinvesting capital into energy-related businesses such as TrustPower, Energy Australia and its 50% interest in Greenstone. The Greenstone acquisition had already delivered ahead of expectations and had marked a turning point for Infratil.
Ryman Healthcare, a provider of care and accommodation for the elderly, continued to deliver a high-quality product enjoying increased demand despite working through a tough period for the property market.
Sky City Entertainment was well placed for medium-term operational improvements from a repositioned Auckland casino once economic conditions improved.
Sky Network Television had spent the past three years investing in its product, software and content to position itself for growth, all of which had been fully funded out of free cash flow. Its net debt had reduced during that period to $450 million. The board was reviewing the dividend payout policy with an expectation that it would be increased.
Deep value:
The Sir Ron Brierley-founded GPG continued to trade at a historically high discount to valuation. The current share price appeared to assume Coats was worth half of broker valuation, and listed investments were discounted by 25% and unlisted businesses by about 50% - all unduly negative assumptions, in the view of Ms Kinnaird.
PGG Wrightson was a company in transition. The new configuration would enable a much higher profile for the seeds business, which was a high-margin business with significant global growth prospects.
Telecom's full-year operating profit would be affected by changes to the Telecommunications Service Obligations regime and rural broadband levy. Substantial cost reductions would be needed to maintain a broadly flat operating profit. Telecom's participation in the ultra-fast broadband project was becoming more likely, avoiding worst-case competition scenarios.
