Since March 2009 the New Zealand stock market has been in the longest bull market in a generation.
Over the seven and a half years to September 2016, the NZX50 has gained 193% in value. This has been driven by strong underlying fundamentals in the New Zealand economy and by a low global interest rate environment. Both these underlying conditions look set to remain in place (albeit with bouts of volatility) for the foreseeable future.
A question facing New Zealand investors now is how to consider their growth portfolio allocation in the context of a sharemarket that has risen so far. On a valuation basis (the price of shares relative to underlying corporate earnings) the price of the full NZX listed basket of companies has risen from a ratio of 16.3 times (trailing) earnings at 1 January 2014 to approximately 20.0 times today.
There are 174 companies listed on the New Zealand sharemarket (NZX), with a total value of $121bn, which is approximately 50% of NZ’s GDP today (Statistics NZ, June 2016). This compares to a listed market size to GDP ratio of approximately 90% in Australia and 150% in the US.
In New Zealand, a disproportionate share of our economic output is concentrated in the hands of privately owned enterprises rather than being accessible to investors via the listed market. Private companies account for 32% of total sales in the New Zealand economy (according to GE Capital, 2015).
According to Statistics New Zealand’s Annual Enterprise Survey, released last week, in New Zealand there are 243 businesses with a turnover greater than $200m and 2,490 companies with turnover of between $20m and $200m. Furthermore, the average return on assets (operating profit before tax to total assets) of the 2,490 companies in 2015 was 5%, double the average of 2.5% return for businesses of over $200m in size.
We believe these attributes taken together make the private company market in New Zealand an attractive place to look for compelling growth investment opportunities. In fact, Milford has had a successful track record in this market with 12 Milford Active Growth Fund private company investments over the past five years.
Listed markets are a hugely important part of the New Zealand economy and Milford has a longstanding and continuing ambition of helping the listed market continue to grow. However, given the large swathes of the New Zealand economy in private, unlisted companies we believe this market also warrants consideration as it can offer good potential for investors on a higher risk / return basis.
John Johnston
Investment Director
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.