The local sharemarket is likely to lag many other developed markets as the influence of former high flying stocks diminishes and the threat of higher interest rates looms.
Other leading markets in the United States, Britain, and Australia have all been in or about record territory. (File image) Photo: 123RF
The NZX Top 50 index surged to a record high in early January, but has since retreated about 8 percent as the tide has turned on large yield-driven company stocks, such as the power companies (gentailers), which included Genesis, Mercury, Contact, and Meridian.
By comparison other leading markets in the United States, Britain, and Australia have all been in or about record territory, driven by continued easy money policies of central banks.
Hobson Wealth Partners director Brad Gordon said the upward movement in New Zealand's 10-year government bond rate, combined with the signal that the Reserve Bank's official cash rate outlook was tracking to 1.8 percent by 2024, were factors in keeping local equities hemmed in.
"You would say that the NZX 50 is performing fairly rationally and sort of within expectations based on a slightly changing benchmark."
Gordon said the market had also been dragged down by a downturn in the largest companies, A2 Milk and Fisher & Paykel Healthcare, which were most exposed to the pandemic and sensitive to interest rate increases as growth companies.
For instance, A2 Milk, once the market hot stock and most valuable company, has revised its earnings forecasts four times over the past eight months because of problems with sales in its key market, China.
However, investor sentiment had turned in favour of companies that initially felt the pain of the pandemic.
"So Covid had very little impact on the earnings outlook for the likes of the gentailers, whereas it did have a material impact on the outlook for commodities and the banks 12 months ago," Gordon said.
"Roll forward 12 months and everyone wants to own commodities and banks, and not so much boring old gentailers."
Australian mining companies have been boosted by strong demand for such commodities as iron ore from China, while banks are seen to have come through the pandemic in solid shape and have returned to paying dividends.
However, Gordon said that while there had been a shift away from yield-driven stocks, the market was still in good shape.
"The quality of the New Zealand businesses is very high in general, and so we don't have any concerns about the outlook for the market."