Mark Lister, 10 August 2017

The August reporting season is upon us, and it will need to be a good one to justify current prices. The S&P/NZX 50 Index had its strongest first six months in history this year, and is up more than 12 per cent in 2017. This has set the bar high, which means results will need to be impressive to vindicate the excellent performance.

The price/earnings (PE) ratio for New Zealand shares for the next 12 months is currently 20.3, which is some 30 per cent above the 20-year average.

Don’t panic. While this sounds lofty, it’s not quite an apples-for-apples comparison. Our market has changed significantly in recent years and because it’s relatively small, when new companies enter the fray they can have a disproportionately large impact on these measures.

Take some of the technology stocks like Xero and Vista Group, for example. Growth companies like these trade at very different valuations to our traditional market stalwarts. The electricity companies have also made a difference in recent years, because of higher PE ratios due to the treatment of depreciation charges.

That’s not to say NZ shares aren’t expensive. They are, just like residential property, farms, bonds, art and classic cars. Just about every investment is trading at above average levels because of abnormally low interest rates, and our sharemarket is no different. On this basis NZ shares are still the most expensive they have been since the July-September period last year, when the PE ratio rose to 22. That was just before the market corrected 12.7 per cent between September and December.

We haven’t yet regained that level. Share prices are still half a per cent below that all-time high of 11 months ago.

Anyway, back to the reporting season. Overall expectations are for median 2017 earnings growth of 6.4 per cent for the NZX 50, with approximately two-thirds of companies expected to see earnings rise compared to a year earlier. Not bad, but will it be good enough?

SkyCity Entertainment Group is the only major company to have reported so far, and it was fairly uninspiring so that’s not a great start. Tourism Holdings and Kathmandu pre-announced some upbeat numbers, while the less said about Fletcher Building the better. I will be watching a few sectors closely in the coming weeks.

Companies exposed to the domestic economy should be in good heart, and their outlook statements will give us a read on the economy.

Those with operations in Australia will be interesting, given the mixed messages from over there. Companies exporting to the rest of the world should also go reasonably well, despite currency headwinds.

Tourism is very strong, so companies exposed to that sector should look solid. That’s in stark contrast to those in the construction industry, which haven’t been able to leverage the strong backdrop. One positive is that we should’ve heard about any significant train wrecks by now.

The so-called ‘confession season’ has been and gone, so any companies set to seriously miss forecasts are obliged to have already given us the heads up.

We should expect a bit of share price volatility though. When prices are high there’s less room for disappointment, so even modest misses can lead to a sell-off.

This article was published in The New Zealand Herald on Thursday 10 August 2017