Most asset classes are “fairly priced to moderately expensive”, according to an analysis by the New Zealand Institute of Economic Research (NZIER).
“… it is difficult to find broad asset class value opportunities in the current environment,” the NZIER report says. “European equities are the main exception”.
NZIER also cautions against sovereign and “sovereign-like” bond investments while supporting currency hedging for New Zealand in most offshore markets except Australia and “some EM [emerging markets] exposures”.
Furthermore, the report is downbeat on future returns from the NZ dairy sector while offering cautious optimism for local commercial property investors.
The NZIER analysis says “KiwiSaver looks OK for balanced-to-growth profiles” but less promising for conservative fund investors.
Somewhat surprisingly, NZIER also found Auckland wasn’t the most expensive local residential property market based on rental returns – an honour claimed by Queenstown. Hawke’s Bay, with projected annual returns of almost 7 per cent over the next seven years offered the best value in New Zealand’s residential property market, according to the NZIER analysis.
The review, published late in March, is a taster for the new NZIER asset allocation advice service the researcher plans to launch by the end of May.
Aaron Drew, NZIER principal economist and former New Zealand Superannuation Fund head of macro strategy, said there was a gap in the asset allocation advice market.
“Groups like Mercer or Russell, for example, tend to offer implemented solutions rather than stand-alone asset allocation advice,” he said.
Australian-based researcher, farrelly’s Investment Strategy, currently provides asset allocation advice to several NZ advisory firms.
Drew said the asset allocation service was aimed at financial advisory groups, corporates and even foreign investors.
“There is some foreign institutional appetite – from Sovereign Wealth funds, for example – for New Zealand investments,” he said.
Drew, who carried out similar analyses at NZ Super said the NZIER asset allocation service would cover all public and private asset classes except, for now, emerging markets.
He said while the final shape of the product hasn’t been finalised, it would take the form of a quarterly report with the option to develop more bespoke reports for individual clients.
The NZIER presentation said its asset-pricing model is based on “a common set of macroeconomic assumptions and a common valuation framework”.
“Our view on expected returns relies on theory and empirical evidence that risk premiums are mean reverting,” the NZIER review says.