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ChartBrief #44 New Zealand stock market

Here's a couple of comments and charts on a market you may not have even thought about before. Before we dive into it, I should take the opportunity to mention that Topdown Charts is actually based in New Zealand (Queenstown, to be precise)! First stop (as usual, when analyzing stock markets) is valuation. According to the Thomson Reuters IBES stats the forward PE ratio for the NZX broad market index remains elevated at 18x vs the historical average of 14.9x - though it has come down somewhat since peaking 20.6x in September last year. As I explained in a previous edition of the Weekly Macro Themes there is a decent chance that we've actually just witnessed a top in the New Zealand share market.

NZX PE ratio chart

Some of the factors that have helped the New Zealand share market perform up until recently include the fact that it is a high dividend yielding market by global standards and thus has been a beneficiary of the global search for yield, there has also been significant flow from New Zealand's relatively new KiwiSaver retirement investment scheme, and more broadly New Zealand's economy has been doing alright with real GDP growth averaging 3% over the past 5 years. Another important aspect has been supportive monetary policy - but that may be about to change.

NZX index vs monetary policy and liquidity

Indeed, the chart above shows a composite view of monetary/liquidity conditions (including cash rates, yield curve, excess money supply growth, bond yields, and credit growth), clearly there has been ample support from liquidity conditions for the NZX market during the bull market. However already this indicator has rolled over - and that has contributed to the drop in share prices.

Further more, the RBNZ will likely have to move from easing to hiking soon as the domestic economy improves, inflation rebounds, and house prices continue to rise, this along with upward pressure on global bond yields will act as a headwind for the New Zealand share market. So with high valuations and impending monetary headwinds the New Zealand sharemarket's boom may soon turn to bust.

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