New Zealand: Underwhelmed and Underweight

New Zealand: Underwhelmed and Underweight

On Friday JBWere recommended clients lower their exposure to the New Zealand equity market. We first outlined our concerns with our allocation to the New Zealand market in October, which have not been assuaged over recent months.

In essence, we have three issues with our New Zealand allocation:

• Price. The local equity market continues to trade at a 5-15% premium to global equities. Additionally, the NZD is elevated against all trading partners.

• Rates. Higher interest rates will be a headwind for New Zealand in 2014, both from the RBNZ and also Federal Reserve tapering.

• Polls. The 2014 election will be an important development for the local equity market. We don’t like the binary risk this presents to investors.

This backdrop leaves us underwhelmed with the risk-reward presented by the local market. Importantly, this does not mean we think NZ equities are necessarily going to decline in 2014. It simply reflects we don’t believe investors are likely to be adequately rewarded for the risks they bear in this market. We have maintained a neutral allocation to New Zealand equities since June 2011. Over this time the local market has delivered a pleasing total return of 37%.

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