The price/earnings (PE) premium commanded by New Zealand equities relative to global comparisons is close to a 10-year high, Forsyth Barr broker Suzanne Kinnaird says.
Foreign ownership levels had contributed to New Zealand equities enjoying an increasing premium rating but there are several issues which could result in that reversing.
Those included global opportunities improving at the same time as New Zealand's economic outlook moderated, she said.
Portfolio equity interest in New Zealand shares was estimated to be 43% of the current market free-float capitalisation.
The reasons given for the elevated foreign ownership ranged from the high-yielding nature of the New Zealand domestic shares to the relative attractiveness of the economy.
''These factors are true, but not new. We do not believe they are sufficient to sustain elevated fundamentals. Foreign investors have opportunities globally and as these become relatively more attractive, ownership levels can change.''
The New Zealand sharemarket was now trading on record high earnings multiples, Ms Kinnaird said.
Higher earnings multiples globally had contributed to some of the PE expansion in New Zealand but that had also been affected by foreign interest and the poor liquidity of the New Zealand market.
Forsyth Barr had analysed returns from global investments compared to New Zealand returns and had made some assumptions which showed the premium New Zealand shares traded on relative to the world had progressively increased.
The firm also noted the recent low in 2012 coincided with the low point in foreign ownership.
Some premium might be warranted, given New Zealand companies tended to operate in duopolies, she said.
The lower competition could allow higher profitability or more ability to pass on higher costs.
Unfortunately, New Zealand was an open economy and as globalisation increased, any premium assigned should dissipate.
''Higher growth domestically could have contributed to the expansion. However, as global economies recover, we believe there is increased risk this premium falls.''
International investment flows were still more important than KiwiSaver, Ms Kinnaird said.
Should foreign ownership fall to 10-year averages, it would suggest potential outflows of about $6 billion from the sharemarket.
While KiwiSaver continued to increase, even if 100% of Australasian equity flows were directed into New Zealand shares, the inflows estimated in the 2015 calendar year were only $500 million, and those were well short of the potential outflows.
Utilities, healthcare and industrials were the largest contributors to New Zealand's relative overvaluation.
Undervalued sectors were: consumer discretionary and materials.
Both those sectors were cyclical, so some of the differential could be explained by the timing differences of the New Zealand cycle, relative to the global comparisons, she said.
Price/Earnings ratio
A valuation ratio of a company's current share price compared to its per-share earnings. For example, if a company is currently trading at $43 a share and earnings over the past 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
Large cap stocks at risk
Foreign ownership is concentrated in the larger capitalisation companies. Auckland International Airport, Fletcher Building, Meridian Energy, Spark and Xero appear the most at risk to a change in foreign investment.
