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NZ Equities: Interesting year predicted

Guardian Trust Funds Management equities manager Ian Arkle outlines a possible scenario for New Zealand shares this year.

Friday, February 2nd 2001, 1:19PM

by Ian Arkle

The year 2000 was a difficult period for the New Zealand sharemarket. The NZSE40 gross index closed down 8.0% for the year. With international markets also having a poor 12 months, it was not a surprising result for New Zealand.

The local market performance was actually quite reasonable when compared to offshore markets, for example;

S&P-500  USA  -10.1% 
Nikkei 225  Japan  -27.2% 
FTSE-100  UK  -10.2% 
DAX  Germany  - 7.5% 

*Local currency returns

What lies ahead for 2001?
The key drivers for NZ equities are likely to be:

1. The outlook for the world economy.
Probably of most importance to NZ is the weakening outlook for the international economy. This is because the NZ economy does not tend to perform strongly in global downturns. NZ's commodity export prices are closely related to changes in global industrial production. With global growth slowing, NZ's growth rate in 2001 is likely to be capped, meaning we are unlikely to see the 5% growth rates observed in past NZ recoveries.

It is now apparent that the US economy has no special means of avoiding economic cycles. Many economic forecasters are now revising down their growth expectations. However, coming to the rescue, somewhat, was the unexpected slashing of rates by the US Federal Reserve (Fed) in January. The continuing debate is if the Fed has moved far enough to stop the US economy from slowing. Further interest rate cuts are probably required as well as the strong likelihood of tax cuts.

2. The outlook for the New Zealand economy.
The New Zealand economy has been going through an adjustment process to reduce the large current deficit. This has required a weak NZD, high interest rates and slow growth. Many forecasters have a positive view on New Zealand for the coming year. Growth is expected to recover to near 3% driven by export increases. We can also expect a falling current account deficit, inflation falling back into the target band and an appreciation of the Kiwi dollar.

The recovery occurring in NZ confidence surveys reflects the improved growth prospects for NZ. This provides the potential for upside surprises in earnings growth for at least parts of the domestic equity market. Additionally, the superb agricultural season locally will help NZ's growth rate to be higher than many of our major trading partners.

3. The supply and demand for New Zealand Equities.
What drives the supply and demand of NZ equities? The answer is principally driven by offshore market direction, interest from offshore investment funds, earnings prospects and takeovers & mergers. Fallings bill yields are usually a pre-condition to the NZ equity market performing strongly. With the Reserve Bank of NZ putting rates on hold for the next few months, while it assesses offshore trends, there is likely to be little benefit on equities from interest rate movements. As mentioned before, picking the trend and sentiment in international equities will be the key as the correlation between returns in NZ and internationally are usually high.

The year 2000 was one of corporate action or 'special situations' with Fletcher Paper, Fletcher Energy, Air NZ, RadioWorks, Montana, Baycorp, St Lukes, and Transalta all with takeovers or corporate activity either completed or still in progress. Looking forward, we can expect further takeovers to drive returns on the NZ bourse. The funds from these takeovers will aid returns as a portion will always return to domestic equities and additionally there are few new issues to dry up cash flows.

There are some other significant factors that could affect sentiment towards New Zealand shares during 2001. These are:

1. The possible merger of the NZ and Australian Stock Exchanges. This could dramatically change the landscape of shares listed on the NZ Stock Exchange. It is likely that a demutualisation of the stock exchange will occur with a merger with the ASX possible still.

2. The impact of the MSCI Index changes as the global stock indices moves towards a free-float index model. Later in 2001, this could have material impact on many leading NZ stocks as international index players either 'have to buy or sell' our securities.

3. Trans-Tasman equity strategy. Most New Zealand institutions now invest part of any new funds into "New Zealand shares" in Australia. Indeed, many Australian shares like Telstra, AMP and ANZ are listed and traded on both markets. If this trend continues the available funds specified to NZ equities will continue to fall.

In summary, we see 2001 as a very interesting year for the NZ equity market. We are expecting positive, but not outstanding returns for equities over the year. However, given the environment, we also think there will be some very good 'stock-specific' situations to follow.

Ian Arkle is the New Zealand Equites manager for Guardian Trust Funds Management.

Ian Arkle is the New Zealand Equites manager for Guardian Trust Funds Management.

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ANZ Special - ▼5.69 ▼5.75 6.09
ASB Bank 6.75 6.09 6.40 6.65
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BankDirect Special - 5.70 ▼5.75 6.19
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BNZ - GlobalPlus 6.74 5.89 6.39 6.59
Lender Flt 1yr 2yr 3yr
BNZ - Mortgage One 7.15 - - -
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Credit Union Auckland 6.70 - - -
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Credit Union North 6.45 - - -
Credit Union South 5.75 - - -
eMortgage 6.04 6.15 6.69 7.19
Finance Direct 6.10 6.45 6.69 7.10
First Credit Union 6.45 - - -
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General Finance 5.95 6.25 6.50 7.10
HBS Bank 6.65 5.85 5.99 6.19
HBS Special - - - 5.89
Heartland 6.70 7.00 7.25 7.85
Heretaunga Building Society 6.70 6.00 6.50 -
Housing NZ Corp 6.74 5.99 6.39 6.59
HSBC Premier 6.84 5.95 5.95 6.39
HSBC Premier LVR > 80% - 5.75 5.75 5.75
HSBC Special - - - -
ICBC 6.75 5.99 6.39 -
Kiwibank 6.65 5.79 6.39 6.65
Lender Flt 1yr 2yr 3yr
Kiwibank - Capped 5.65 6.50 - -
Kiwibank - Offset 6.55 - - -
Kiwibank LVR > 80% - - 5.89 6.19
Liberty - - - -
Napier Building Society 5.80 6.00 6.70 -
Nelson Building Society 6.95 6.15 6.60 -
NZ Home Loans 6.85 6.09 6.40 6.65
Perpetual Trust 7.70 - - -
Resimac 6.59 6.35 6.58 6.77
SBS Bank 6.65 5.85 5.99 6.19
SBS Bank Special - - - 5.89
Lender Flt 1yr 2yr 3yr
Silver Fern 5.95 6.10 6.55 7.05
Sovereign 6.85 6.09 6.40 6.65
Sovereign Special - 5.70 5.75 6.19
The Co-operative Bank 6.70 ▼5.70 ▼5.89 6.19
TSB Bank 6.74 5.95 6.19 6.30
TSB Special - - 5.79 -
Wairarapa Building Society 6.20 5.75 5.95 -
Westpac 6.59 6.09 6.39 6.65
Westpac - Capped rates - 6.74 6.99 -
Westpac - Offset 6.59 - - -
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