New Zealand stock market a world-beater, against the odds

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New Zealand is riding high this year as one of the world's best performing stock markets in spite of an earthquake, a weak economy and a foreign debt burden on a par with Greece.

The share market, worth a total of around only USD 48 billion, is up almost 5% so far this year, with most of those gains coming after a February 22 earthquake wrecked Christchurch, the country's second-largest city, killing 181 people.

The rise is modest in absolute terms, but stellar when compared with many other markets in an uncertain world. The rally has been supported by investors in Australia turning away from the Sydney market, which is down 2% this year.

In recent weeks, New Zealand's benchmark top 50 index has at times been the world's top performer, outpacing the US market in its continued rebound from the crash of 2009 and overtaking the up-and-coming emerging market of Indonesia.

"The earthquake was a dreadful disaster but what it's done has been to keep monetary policy easy, at the same time as a massive amount of money is flowing in for the rebuild from the global reinsurance companies," said Andrew Bascand, managing director at Wellington-based Harbour Asset Management.

A strong run-up in the New Zealand dollar since a 2011 low in March has added to gains for investors who entered the market in time. The currency is now trading close to a 30-year high.

In US dollar terms, the New Zealand stock market is also one of the best performers in the world.

That's not to say there are no risks. New Zealand is highly exposed to the global economy. Like Greece, external debt is about 77% of GDP although in New Zealand the liability lies with the private sector rather than the public one.

That is difficult to change since low domestic savings push borrowers offshore, leaving the banks in particular exposed to the vagaries of the global economy.

In addition, the strength of the New Zealand dollar could be off putting for foreign investors considering fresh investment.

That leaves analysts cautious about the outlook.

"The New Zealand equity market will be influenced by global equity markets and they look to be improving at the moment, but there are many risks out there," Bascand said.

Cost of reconstruction

A post-quake rebuilding plan due to start over the next six months anticipates spending of USD 12.5 billion -- equal to around 7% of gross domestic product.

The prospect of reconstruction has helped push pipe-maker and steel supplier Steel and Tube up 25% this year.

Shares in New Zealand's biggest-listed company, building products firm Fletcher Building, are up more than 9%.

On the flip side, New Zealand insurer and fund manager Tower Ltd is down 28% this year. Its first half profits fell 54% as quake-related costs overwhelmed gains in its investment business.

The central bank has also kept credit cheap, making an emergency rate cut shortly after the quake. The rate remains at a record-equalling low of 2.5%.

The next move may be up now that the economy is through the worst, but economists expect only gradual increases from end-2011.

"In the continuing low interest rate environment we're seeing more money flowing into the market," said Bryon Burke, head dealer at Craig Investment Partners.

"Most people have had their money in rental properties or finance companies and as they've lost favour we've seen that money come to equities," Burke said.

After several years grappling with recession, the market has also been bolstered by greater interest from neighbouring Australia, whose bourse ranks among Asia's worst-performing markets.

Australians and other foreign investors make up just over a third of the New Zealand market.

State assets

Hopes for the sale of state assets has also boosted sentiment by reducing concerns about debt. The nation may soon be able to achieve something that Greece can only dream of: a successful sale of state assets, the biggest privatisation agenda in a decade.

The centre-right National government, well ahead in the polls, has pledged to sell down stakes in five companies -- three power generators, a coal miner, and the national airline -- if it wins the next general election in November.

The sales would pump around USD 5.8 billion in into the market, but a track record of out-performance, coupled with a state pension system that creates pent-up demand for local equities, is expected to absorb that additional supply.

"The new supply will attract new demand and for that, it helps if the New Zealand market has got a decent base of performance," said Goldman Sachs Auckland-based strategist Bernard Doyle.

New Zealand's market was an underperformer in 2010 when compared with global markets, as the economy struggled to escape its worst recession in more than 30 years during 2008 and 2009.

"They were three pretty tough years and with those as a starting point, you don't need much of a pickup in the economy to translate to a fair bit of relief on the earnings front," Doyle said.

Even sport could determine how well the stock market does. New Zealand hosts the final of the Rugby World Cup in October, a prize that the top-ranked team in the world has embarrassingly failed to win since 1987.

Past defeats have shown up in weaker consumer spending, so a long-awaited win on home soil this year would be the icing on the cake for a market that has succeeded against all the odds.

(USD 1-NZ$1.21)