Why it's time to invest at home

By David McEwen

Monday 20th May 2002

Many kiwi investors enviously watched the rapidly escalation of share markets overseas during the 1990s.

Not without reason. One dollar invested in most western markets ten years ago would be worth three now while one dollar invested in the New Zealand market would now be worth, well, around one dollar.

However, the tide has changed. There are now a number of good reasons why New Zealand shares are likely to be more attractive investments over the next few years than international ones.

- Attractive Yields

The days of buying shares in loss-making dot.com companies and selling them to somebody else at higher prices are over.

Investors now want to invest in companies that have real assets and earn real income. They also want a decent percentage of that income paid out to shareholders in the form of dividends.

As it happens, New Zealand companies tend to pay better yields than those on other markets.

That's because local investors demand dividends, encouraging companies to pay out most of their net profits.

Another reason that yields are higher is that our shares are cheap relative to their earnings. That leads us to our next point.

- Low Earnings Multiples

The price of a share reflects expectations of its future earnings.

If investors think a company going to grow strongly, they will pay a high price relative to current earnings in the expectation that they will benefit later.

This competition between hope and reality is measured by a price/earnings ratio.

Popular companies tend to have high p/e ratios, sometimes hundreds of times their current earnings.

This is all very well, until expectations of future growth decline.

Companies that can't or don't grow their profits as fast as investors expect can get sold down savagely.

Average p/e ratios in New Zealand are much lower than most other markets. While that may reflect expectations of low growth, it also means that they don't have far to fall if things don't go to plan.

- Rising Kiwi Dollar

Economists believe the New Zealand dollar will continue to strengthen, especially against the US dollar which is trending down. If so, then now is not the right time to be putting money into overseas assets (probably the reverse). As time goes by, New Zealand dollar earnings and assets are likely to go up in value relative to overseas ones.

- Imputation Credits

Dividends paid to New Zealanders by local companies are treated as tax-paid to the extent that the company has paid corporate tax.

If a company pays the full rate of tax on its earnings, then shareholders in most cases receive their dividends totally tax-free.

This does not apply to dividends from overseas companies, meaning investors are being taxed twice.

- No Capital Gains Tax

In most western markets, investors have to pay tax on the net value gains of their assets. If they buy $1000 worth of shares and sell them for $2,000, they have to pay income tax on the extra $1000. New Zealand does not have such a tax.

Kiwis have a tendency to treat all things international as better than home grown. However, we have many good locally listed companies and, given the above factors, investors could do worse than keep their money at home for a while.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz.

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