And fall harder it has. The main NZX50 index is down almost eight per cent since last month, more than double the falls we’ve seen in Australia or the US.
I’m not suggesting this underperformance is unjustified, because I think it is.
There’s also a good chance we will be a more modest performer over the next few years, compared to recent history. However, there are a couple of nuances regarding our market that remain underappreciated by many casual market watchers and commentators.
The key issue is that dividends are so much higher here in New Zealand, and that our headline index, the NZX50, includes these payments to investors. That’s a major difference to all of the other oft-quoted sharemarket indices around the world, including the S&P500 in the US, the FTSE100 in the UK or the ASX200 in Australia.
All of those other sharemarket measures capture the changes in share prices only, while ignoring dividend payments. This means we’re not comparing apples with apples, because we’re sometimes overestimating our returns relative to others, or vice versa.
Take the last five years for example. At first glance, NZ shares are up an astounding 129 per cent, compared with the S&P500 in the US which has risen a more modest 92 per cent.
But if we strip out the dividend payments investors have received here, we find that share prices here are up “only” 82 per cent.
That’s still a great return, but all of a sudden lagged we’ve the US market, rather that smashed it out of the park. If we add dividends to both, the US market return increases to 113 per cent, so our 129 per cent still puts us in front on a “total return” basis, but the gap is a lot closer than many might have thought.
By the same token, the widely quoted NZX50 index is 62 per cent higher than its 2007 peak, compared with the S&P500 which is just 36 per cent above those levels. However, if we ignore dividends and look at the NZX capital index, than NZ share prices are only eight per cent above their pre-GFC highs. A stark difference.
The NZX isn’t cheating or misleading anyone. There’s nothing wrong with using a gross index (the term for one that includes dividends and share price moves) instead of a capital one (share price moves only).
We have a market that provides much higher income than others, but with generally lower growth. The bulk of returns from NZ shares come from dividends rather than capital gains, as much as two thirds over the long-term. If we didn’t include dividends we’d be doing ourselves a major disservice, so we’ve got a problem either way.
We just need to acknowledge these differences when making judgements about returns and valuations, especially when comparing ourselves to offshore peers.
This article was published in The New Zealand Herald on 20th October 2016.