Sharebrokers have divergent views on the year ahead for the NZX, which will be boosted by the listing of Mighty River Power as the Government begins its mixed-ownership model.
The Government plans to sell up to 51% of Mighty River, probably in the third quarter of the year. That will be followed by the partial listings of Genesis, Meridian and Solid Energy, and a further sell-down of Air New Zealand to 51%.
Forsyth Barr broker Peter Young said the global risks would remain elevated in 2012 with a European recession likely, sovereign debt concerns still unresolved and the risk of slower growth in China, which could affect New Zealand directly as well as through the trade links with Australia.
"Nevertheless, we view the economic outlook for New Zealand over the next couple of years as favourable. Although the first half of 2012 may be difficult, we expect a positive year for the sharemarket overall." Given the near-term global economic risks, Forsyth Barr's investment strategy had a bias to safety and its New Zealand model portfolio had been structured to blend defensive, growth and deep-value attributes.
The valuation fundamentals for the New Zealand market were supportive of positive returns of between 15% and 20%, he said.
The key driver for the equity market would be the timing of economic growth recovering towards 3%, which would bring improved revenue and profit growth.
"We expect confidence in the economic outlook for 2013 and beyond to increase through 2012, forming the basis of our positive outlook for the sharemarket," Mr Young said.
Stocks that had earnings downgrades in the past six months had had large declines in their share prices. That had led to a significant variance between the "feel-good stocks", those that were performing well, and the "out-of-favour stocks" experiencing lower earnings and share prices. That was leading to higher-risk stocks, such as Fletcher Building, becoming oversold, he said.
The best returns over the past few years had been made in bonds, as yields had fallen to historically low levels.
Shares, with a median gross dividend yield of 8%, were now trading at such a large premium to the prevailing five-year bond rate of 3.3% that investors were effectively being paid to be patient ahead of the recovery phase, Mr Young said.
However, Craigs Investment Partners head of research Mark Lister expected 2012 to be another year of lean returns for investors.
High debt levels and lack of political unity in Europe and the United States would continue to dominate headlines and markets.
"We expect that, as a result, interest rates will remain low throughout the year, as growth remains very sluggish. This will be good for borrowers but will mean that savers will continue to face modest returns from fixed interest and bank deposits," he said.
Craigs expected the returns from shares to reflect those low levels of growth, although the high dividend yields and strong financial position of many good-quality companies in Australia and New Zealand should ensure that well-managed companies that were exposed to the right sectors with strong balance sheets and cash flows would continue to perform well, Mr Lister said.
Top 5 picks
Forsyth Barr: Peter Young
Chorus: The company will be a regulated monopoly fixed-line access network across the areas in which it won the ultra-fast broadband tender. As the UFB build progresses, it will lose customers outside its own areas and it bears the UFB build cost over-run risk. The share price is trading well below valuation.
F&P Appliances: The shares are very cheap and investors are being well paid for the risk being taken on. In particular, the value of the finance business is underpinning the share price with very little being paid for the appliance business. In the appliance business, the company is doing the right things internally and product launches in the coming months should boost its competitive place in the market.
Fletcher Building: Fletcher Building's near-term earnings have been negatively affected by the slowdown in Australia and the ongoing weakness in New Zealand.
Delays in the timing of the rebuilding of Christchurch have also been an issue. The expected building activity in New Zealand should start a strong sustainable recovery in calendar 2012 which should lead to a substantial uplift in earnings in the 2013 financial year.
Ryman Healthcare: Ryman is a leading New Zealand-focused success story. It continues to deliver a high-quality product and is enjoying increased demand given the compelling demographics in its favour with the projected doubling of the population aged over 75 years in the next 20 years.
Sky Television: Sky is well positioned for growth. Demand for MySky HDi continues to exceed expectations. Ongoing net subscriber growth of more than 30,000 a year is achievable over the medium-term. Sky has spent the past three years investing in its product, software and content to deliver all of its key services, fully funded out of free cash flow. Sky has increased its dividend payout and now resembles a dividend growth utility.
Craigs Investment Partners: Mark Lister
Chorus: As an infrastructure owner, we like the reliability of the cash flows generated by the company's assets. We believe the 8.5% dividend yield provides the basis for a solid, predictable return and that as dust settles and the company proves itself as a separate entity, it may generate further investor interest.
Auckland International Airport: Our positive view of Auckland International Airport reflects our expectations for strong operating leverage as passenger numbers recover off cyclical lows, a step up in property development initiatives and an improvement in retail spend after retail development in recent years.
Ryman Healthcare: Exceptional quality, core holding in aged care sector. Aged care demand set to leap with rapidly ageing demographic. Existing sites still have capacity for growth and new sites provide solid pipelines and confidence in ongoing growth of the business model.
Fletcher Building: A good quality equity exposure to a cyclical recovery in New Zealand. Difficult trading conditions persist and have prompted one earnings downgrade and there may well be further slippage.
However, this is largely a deferral of cash flows from an eventual housing recovery and a delayed Canterbury rebuild. We believe current prices reflect these risks.
Westpac: The financial sector globally faces numerous challenges and credit growth will remain weak as households and businesses pay down debt. The Australian banking sector is one of the strongest in the world, provides a very attractive dividend yield of about 8%, and looks reasonably priced.
