The time is ripe to diversify wealth, says NZIER – Investment Quarterly, September 2015

16 September 2015

New Zealand Institute of Economic Research (Inc)
Media release 16 September 2015
New Zealand Investment Quarterly, September 2015

The month of August 2015 provided a salutary reminder of why equities and other growth assets command a risk premium. Markets fell over 10% and intra-day market volatility rose to levels not seen since the GFC period. The NZ dollar continued its slide.

The corrections in equity and currency markets have moved prices much closer to our estimates of fair value. In the June NZIQ we saw the NZ dollar as being materially over-valued, we now assess it to be around fair-value. We also assessed equities to be moderately expensive in most markets. We now assess global equities to be slightly cheap, with Europe and Emerging Markets offering better value than the US, UK and New Zealand markets.

We continue to regard global defensive assets as offering poor value. Despite Chinese wobbles, US interest rates will likely climb over this year when the Federal Reserve finally lifts rates. Our view is that interest rates will eventually need to go considerably higher than what is currently factored into bond prices.

In New Zealand, the RBNZ has taken the view that “emergency” policy levels are required given downside Chinese risks. This is a bold move when, for now, the New Zealand economy remains relatively strong and Auckland’s housing market remains red hot. Its over-valuation is, if anything, starting to spread to other regions.

In New Zealand we struggle to find asset classes that offer good value. New Zealand equities are relatively expensive compared to international counter-parts. New Zealand residential property is also assessed to be materially over-valued, particularly in Auckland, where we expect a negative capital return over a medium-term horizon. Commercial property offers better value, but cap rates are getting very slim and our constructive outlook depends on rental growth remaining robust.

We also assess dairy farms to be quite over-valued based on recent transactions. Investors would need to accept a relatively low risk premium or believe dairy prices will recover quite strongly to justify paying today’s prices. The risk is that dairy prices do not rebound as strongly, and we see prices remain low for the next few seasons.

Recent RBNZ data suggests a staggering 95% of wealth in New Zealand is tied-up in domestic assets. This suggests there is a need for New Zealanders to diversify wealth into other markets. In our assessment the timing is opportune now. The key asset allocation messages of the NZIQ are to favour international assets over domestic, and growth assets over defensive.

The NZIQ offers an independent assessment of the New Zealand investment opportunity set.

Read about NZIQ subscription options here.

For further information please contact:
Aaron Drew, 021 992 942, aaron.drew@nzier.org.nz

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