The NZX50 Index, which is the main index for tracking the performance of New Zealand shares, reached an all time high of around 11,495 this December. This means it is up by over 31% since the beginning of 2019. The NZX 50 is made up of the top 50 shares in terms of market capitalisation – that is, the value of the total number of shares on issue. In December, 2009 the index sat at around 3,200. This means it has risen by around 360% over the last ten years. While this is good news for investors in New Zealand shares, the big question is where to from here?
The market has been fuelled by low interest rates. Rather than roll over term deposits, investors are chasing shares with high dividends or high capital gain to improve their return. The more money there is chasing the same number of shares, the higher the price goes, thus attracting even more investors.
The fundamental value of any share is based on company earnings. It is only emotion – fear or greed – which sees a share price vary from its fundamental value. Company earnings are significantly impacted by the state of the local and global economies. New Zealand share prices are now out on a limb compared to the rest of the world when compared to expected future earnings and economic growth.
Looking ahead, the good news is that the local economy is still doing well. Employment levels are high, growth is better than expected, and the Reserve Bank chose not to lower the Official Cash Rate at the last review. However, economic growth is expected to slow and New Zealand shares may not perform as well as global shares going forward. The usual rule applies; maintain a diversified portfolio to reduce your investment risk.