Broker: look beyond 'all-time high' reports

Nearly every day, the New Zealand sharemarket is said to have reached an all-time high and, almost uniformly, the market is described as being overvalued. Hamilton Hindon Greene broker James Smalley is calling it ‘‘fake news’’. Business editor Dene Mackenzie reports.

On the face of it, there seems to be a reasonable response being espoused by commentators when the New Zealand sharemarket continues to reach new highs.

On Friday, the NZX50 closed a smidgen below 9000, after briefly going over the 9000 mark a week earlier.

Hamilton Hindon Greene broker James Smalley says often, the term all-time high is accompanied by breathless reporting of an over-valued market.

Detailed analysis proved otherwise, he said.

The Gross Index of the NZX was the most quoted and, since May 2007, the Gross Index was up 108%, while the Capital Index was up only 23%.

``It's actually quite simple. A capital index reflects the share world scenario that companies are worth less after they pay their dividends.

``This is simply because they no longer have the cash in their bank account due to the payment.''

When a company paid a dividend of 10c per share, all things being equal, its share price would fall by 10c. A capital index would fail to reflect the drop in the share price.

A gross index, in contrast, did not fall when a company paid a dividend. It reflected both share price movements and dividend payments, Mr Smalley said.

Although the company in the example was trading on the market down 10c because it had paid its 10c dividend, the gross index would not drop.

The difference was important. In direct contrast to the NZX, every other main world index, such as the Nasdaq or the Dow Jones, against whose level the NZX was quoted, were capital indices.

The NZX was one of the highest-yielding sharemarkets in the developed world - possibly the very highest.

And a gross index did not reflect the real price movements of the companies within the index, he said.

Movements in the gross index level could give a false impression of share price growth.

The NZX had a income yield of about 5.5%. In a scenario where every single company's share price was unchanged for 12 months, the Gross Index would still be up 5.5% due to the level of dividends paid out. Investor portfolios would show share price growth of 0%, Mr Smalley said.

Since May 31, 2007, the Dow Jones had grown 85%, the S&P 500 was up 82%, the Nasdaq was up 198%, and the NZX 50 Capital Index was up 23%.

``I don't think any investor would be overly concerned they are paying for an asset that has returned just 23% capital growth over the past 11 years, or just 1.91% a year compounding.''

Each share portfolio would be unique to an investor's own personal circumstances. Reports of ``record highs'' should not concern or prevent investors from investing in the market, he said.

For those looking for income, the market was attractive and share prices, contrary to what one might intuitively think, had not performed strongly when looking over the medium to long-term, which is what share investors should do.

Mr Smalley advised ignoring ``fake news'' of record highs, because the New Zealand market still represented real value.

 

Comments

This is one of those misleading claims that regularly get trotted out by people who don't know what they're talking about. A gross index directly measures total shareholder return, whereas a capital index measures only the capital gain component. So rather than the former giving "a false impression of share price growth", it would be far more accurate to say that the latter gives a false impression of wealth growth — which is what investors actually care about. Whether it comes in the form of dividends or capital gains is irrelevant (although there may be tax considerations that favour capital gains).

In this case, the claimant doesn't seem to even agree with himself — the S&P 500, like the NZX 50, is a gross index.

NZ people are not keen investors in our sharemarket.
And so are not supporting our NZ companies.
We are regularly losing companies to overseas investors.
The business news is often about Google, Amazon, Bunnings, Coundown, Top Town.
Not F and P, Pushpay, GTK, Spark or any of our $1 billon TIN businesses.

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