EXPENSIVE, YES. BUBBLE, NO.
Mark Lister, 10 October 2017
The local sharemarket hit a milestone recently, with the NZX 50 index pushing through 8000 points for the first time. Understandably, many people are asking how sustainable this is and just how worried we should be.
One point that’s lost on many casual market watchers is that our NZX 50 index can’t be easily compared with the other major ones around the world.
The NZX 50 is a gross index, which means it not only captures share price movements, but also dividend payments. This is quite different to the widely followed indices elsewhere, like the S&P 500 in the US or the FTSE 100 in the UK, which only track share price movements.
Take the last 12 months for example. The NZX 50 has returned a little more than 11 per cent, but when dividends are ignored, the return from NZ shares is a more modest 7.3 per cent.
That’s less than half the gain we’ve seen from world shares over the same period, which is around 20 per cent.
It’s a similar story over longer timeframes. The NZX 50 is up more than 100 per cent in the last five years, meaning it’s doubled. That’s way ahead of the S&P 500, which has put on 75 per cent in the last five years. Surely we’re overcooked if we’ve outpaced them so much.
But hang on, if we strip out dividend payments local share prices are up 68 per cent. That’s still a great return, but we’re actually a little behind our American counterparts.
Our market pays highly attractive dividends (about double the global average) so in overall terms we’re ahead of most others. That’s certainly no bad thing, but it does mean we run the risk of comparing apples with oranges.
Yes, we’re up some 250 per cent from the absolute low in 2009. However, a big chunk of that gain is the eight years of healthy dividend payments. Push those to one side, and share prices are about 130 per cent above that low point.
NZ share prices are actually just 18 per cent above the 2007 peak, compared with the US market which is some 60 per cent above those levels.
Another important point to note is that during this last year our market has been driven higher by a small group of specific shares, which have been nothing short of spectacular.
a2 Milk has almost tripled in value, Synlait Milk, Air New Zealand and Xero have doubled, while Tourism Holdings has put on 50 per cent.
Our market is small, and big moves from a handful of companies can have a disproportionate effect. Outside of these five superstars (and ignoring the five worst performers too) the average gain over the past year is a more subdued six per cent.
That’s not far off the long-term average, and it doesn’t sound unreasonable when you consider average earnings growth has also been about 6-7 per cent this year.
I’m not arguing NZ shares are cheap. At a price/earnings ratio of almost 20 and an average gross dividend yield of 5.2 per cent, we’re trading above long-term averages.
However, we’re no worse than at any point during the past 18 months on those measures, and the 8000-mark doesn’t necessarily mean we’re on the verge of collapse.