Sharemarkets on cusp of new highs

Many world sharemarkets are poised to reach new benchmarks next week, as investment continues to grow and worries about Europe start to recede.

The NZX50 closed last night 4318 points, up 96 points for the week. Having risen 78% since March 2009, the index was a ''whisker'' away from hitting its record high from May 2007 of 4333 points, Craigs Investment Partners broker Chris Timms said yesterday.

There were some fundamental differences between the New Zealand sharemarket in 2007 and today, he said.

New Zealand shares were not as expensive now as they were in 2007. In May 2007, New Zealand shares were trading at a price-earning (PE) ratio of 16.9 times, 21% above the 20-year average of 14 times.

Today, shares were trading at 15.7 times.

''While that is still 12% above the 20-year average we haven't got near the heights of 2007,'' Mr Timms said.

Unlike 2007, dividend yields on shares were well above bank deposit rates. In 2007, a six-month term at the bank was paying 7.5% while shares offered a gross dividend yield at 4.9%. Today, the same term deposit paid below 4% while shares were paying 5.8%.

''With such a strong focus on income, and against the backdrop of low interest rates, it's hard to argue that shares look overpriced when measured on dividend yields,'' Mr Timms said.

Earnings forecasts were realistic, rather than optimistic, he said.

In May 2007, analysts were expecting New Zealand companies to grow their earnings by 11.4% over the following 12 months then again by 11% over the next 12 months. Those expectations proved far too hopeful.

About 40% of New Zealand's listed companies saw earnings fall over the next year rather than rise and the median increase was barely 3%.

''Today, we expect earnings to grow by about 10% this year and next year. Having just seen some excellent results from the likes of Summerset, Auckland Airport, Delegat's and Sky Television, this now seems realistic.''

Company debts were also much lower now, Mr Timms said. Whether it was governments, households or corporates, having too much debt was a huge part of the problem in 2007. It was comforting to see that, on average, listed companies had lower debt now than they did in 2007. The average level of gearing today was 27.5%, down from 31.1% in 2007.

''Finally, despite a great 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, there was $48.6 billion invested in New Zealand shares and managed funds, 8.3% less than invested in the middle of 2007.

The New Zealand-denominated deposits with the local banks were a ''whopping'' $108 billion, a 52.6% 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,'' Mr Timms said.

Overseas, US stocks ended flat yesterday, denying the Dow Jones Industrial Index a chance to reach all time highs.

The Standard and Poor's 500 still managed to end February with a fourth straight month of gains.

The US economy grew slightly in the fourth quarter, a turnaround from an earlier estimate showing contraction. In Britain, the country's top share index extended its winning streak to nine months. The blue chip FTSE 100 index closed at 6361, finishing up 1.3% for the month, and extending its longest monthly winning streak since 1997.

- dene.mackenzie@odt.co.nz