Much has been promised to investors for the coming year. New Zealand Assets Management is promising a profit boom this year. Bank economists are looking forward to a strong rebound in economic activity. Business Editor Dene Mackenzie sifts through the predictions.
Forsyth Barr broker Ken Lister was pleased to see the end of 2009, which marked the end of the bear market as the global economic downturn bottomed out and markets started looking forward again.
Despite a tough start to last year, all equity markets ended the year in positive territory based in local currencies.
The rally since March 2009 had eliminated the broad undervaluation across the New Zealand.
"We see 2010 reverting to be a stock picker's market. While equities may track sideways over the first half of 2010, we are targeting a gross return of more than 20% over the next 18 months," Mr Lister said.
He believed the medium-term outlook for equities was positive but that the focus should and would be on mid-cycle earnings which Forsyth Barr analysis suggested should support a target gross return for the New Zealand equity market of more than 20% over the next 18 months.
Historically, New Zealand market recovery rallies after major sharemarket corrections had occurred over a relatively short period of six to nine months from the trough, with a subsequent period of flatter performance.
"We are now 10 months past last year's market low, and with the rally running out of steam over the last few months, the pattern of this recovery could be similar."
The latest market rally had been more muted so far than the rallies after the 1990-92 recession and the Asian crisis, despite New Zealand and Australia arguably being more favourably placed this time around because of their exposure to Asian demand which was likely to drive the global recovery, Mr Lister said.
"We believe the medium-term outlook for equities is positive as we transition from an earnings downgrade cycle to an upgrade cycle. Global markets have generally rebounded to levels that historically would suggest a sideways bias for the first part of 2010, as there remains ongoing near-term earnings risk."
Investors should look past that and focus on the mid-cycle earnings.
Forsyth Barr's approach to selecting the stocks for its New Zealand equity model portfolio had been to identify the key investment themes and select stocks that were being mis-priced within the targeted investment groupings, he said.
Theme one was backing the dollar to depreciate over the next year, not dramatically but the balance of risk was to the down side versus the euro and United States dollar.
Mr Lister was looking for stocks with foreign dollar exposure, exports and or subsidiaries.
He picked Delegat's, Guinness Peat Group and Fisher and Paykel Healthcare.
The second theme was looking for genuine long-term growth at a reasonable price.
They were target stocks that could deliver top-quartile earnings growth in the New Zealand market and were trading at a discount to valuation.
Those stocks were Auckland International Airport, Sky Network Television, Delegat's and Ryman Healthcare.
Theme three involved finding defensive and utility earnings at a reasonable price.
They were Contact Energy, Infratil (TrustPower), Sky City Casinos and AMP NZ Office Trust.
The last theme was finding deep value, identifying stocks that were still being deeply undervalued.
They were Air New Zealand, Fisher and Paykel Appliances and PGG Wrightson, Mr Lister said.
Craigs Investment Partners broker Chris Timms said that a year ago, Craigs headed its outlook report: "Buy low, sell high now in play".
"We argued that the `buy low' rule was now in play, based on the fact that at the time, equity markets had all but halved from their 2007 highs, valuations were reasonable and dividend yields were attractive with many leading stocks offering gross yields of 7% to 8% or more."
It was a good call at the time, he said.
Markets reached the bottom in early March and rallied strongly over the remainder of the year.
Twelve months on, the latest outlook report was a much tougher proposition to put together.
Markets were no longer "cheap" and Craigs lacked the confidence to issue another "buy low" recommendation.
In Craigs' view, with risks and positive influences delicately poised, a high level of uncertainty around outcomes and markets trading near fair value, Craigs expected a solid, but not spectacular year, from equities and balanced port-folios, Mr Timms said.
Overseas markets might deliver slightly higher returns for New Zealand investors, thanks to an expected fall in the New Zealand dollar.
Craigs had forecast a total return of 10.4% from global equities, including a 5.2% contribution from a lower dollar.
In Australia, Craigs was expecting a slightly lower return of 7.6%.
"We also expect bond yields to end the year higher as interest rates continue to rise over 2010 driven by rising inflation concerns and increased issuance of bonds by governments."
Mr Timms forecast the official cash rate to be 4% in a year's time, up 1.5% from its current level of 2.5%.
Inflation was expected to pick up from this year's 1.8% to 2.5% next year.
The rate was still within the Reserve Bank's target range of 1% to 3%, he said.
With so much slack in the economy, inflation was not expected to be problematic in the short-term, although there was concern about the long-term inflation implications of the extended period of loose monetary policy currently in place.
The dollar was expected to soften gradually from current levels as the yield advantage dissipated.
Some rebound in the US dollar could be expected as the overly negative sentiment towards the United States abated and its economy stabilised.
Craigs was forecasting the New Zealand dollar to fall 5.7% against the greenback this year, with more modest falls against the Australian and British currencies.
New Zealand Assets Management director Alan McChesney said a "profit explosion" in the US was potentially 2010's big surprise.
"US businesses have used the sharp downturn to slash costs - especially labour - and are now running lean and hungry enterprises with strong cash flows where any increase in revenues will be directly translated into profits.
"While many commentators have expressed the view that this cost-cutting will have a one-off short-term benefit, they miss one critical point - businesses will be able to hold off increasing overheads for quite some time, only adding staff when it is absolutely necessary to do so."
That would lead to a very large labour productivity gain for the US economy, he said.
US businesses were generally in good health, primarily because they had not carried significant debt into last year's "carnage".
Low interest rates and ample liquidity gave those businesses the opportunity to aggressively restructure their borrowings and reduce debt, having been burnt by over-investment decades earlier.
"Having finally manoeuvred themselves into a much stronger balance sheet position, these companies were reluctant to chase the cheap money that was around prior to 2007," Mr McChesney said.
As the world remained US-centric with global equity markets taking their lead from the performance of the US, that should augur well for the performance of global sharemarkets.
Defensive stocks would be the main beneficiaries of the profit boom.
Not only had they cut costs, but many derived a sizable portion of their revenue from emerging markets such as China where the economic recovery was well under way.
The second part of the US recovery should come from the export sector where the weak greenback placed US companies in a competitive position relative to the rest of the world, he said.
A surprise US profit boom should not be confused with a strong global economic recovery.
While many economic indicators were looking better, with some countries, such as China and Australia, already returning to positive growth, unemployment would continue to worsen and governments in developed economies, like New Zealand, would have to cope with budget deficits that might be a legacy for a generation or more to come, Mr McChesney said.
Questions remained about the quality of the stocks that had driven the equity market rally in 2009, something several of his fund managers had referred to as the "trash rally".
A near-perfect global economic outcome would be needed to justify their current pricing, something which suggested those stocks might be vulnerable to a correction that would impact significantly on the indices.
"While we should not expect a strong economic recovery, there are a number of good reasons for canny investors to seek some targeted sharemarket exposure," he said.
