NZ shares slip as investors sell yield stocks

New Zealand's main share index fell slightly as investors sold interest-rate sensitive stocks and bought economically sensitive stocks. Meanwhile, BNZ abandoned predictions the NZ dollar would climb.

Friday, October 8th 2021, 6:11PM

by BusinessDesk

The S&P/NZX 50 Index fell 18 points, or 0.1%, to 13,086.6. Turnover was $125 million.

Analysis by Forsyth Barr today showed economically sensitive stocks had climbed 5% last month, dramatically outperforming the index.

“Cyclicals provided a strong bounce during the month of September as the overall market benchmark index took a pause, returning just 0.4%,” they said in a note.

A cyclical stock is one where the price is affected by macroeconomic changes. Usually, because it provides products or services which are bought more during a booming economy and less during a recession.

Fletcher Building is a clear example, with construction activity often linked to economic activity. Its shares rose 2% to $7.28 today, having climbed 25% this year.

Move Logistics is another example – up 1.9% at $1.60 today – as is specialist lender Heartland Group which rose 0.9% to $2.31.

On the other hand, defensive yield stocks have been particularly weak – falling 1.2% in September – as market interest rates have climbed reducing their attractiveness.

Defensive yield stocks are those which are relatively immune to macro trends, such as utilities and property stocks.   

Property stocks were some of the worst performers today as their valuations are eroded by higher interest rates.

Precinct Properties led the decline, falling 2.4% to $1.65, followed by Investore Property down 2% to $1.96 and Kiwi Property Group down 1.7% at $1.15.

The NZX 50 contains a lot of defensive yield stocks and is often sensitive to changes in interest rates. 

Its correlation to NZ 90-day bank bills has moderated from last year but is still at a level only previously experienced during the global financial crisis.

Its correlation with the US 10-year treasury note has also fallen from 2020 but remains at a decade-long high, according to Forsyth Barr’s analysis.

Meanwhile, the relationship between the benchmark index and the US to NZ dollar exchange rate remains at a historically low level, despite climbing from last year.

This may be good news for equity investors as BNZ today predicted the NZ dollar will be unlikely to make any significant gains in the next 12 months.

This reverses earlier calls which predicted the local currency to climb significantly against the US dollar, potentially moving higher than 75 US cents.

“It’s fair to say that economics has been turned on its head over recent years,” said Jason Wong, a BNZ strategist.

“Currency markets are similar in this regard, with relationships broken and movements not entirely making sense.”

This disconnect has resulted in the NZ dollar having a “middling performance” and trending lower against the US dollar, despite the NZ economy outperforming its trading partners.

Wong said the outlook was now looking more challenging for the NZ dollar, leading the bank to abandon its forecast for the US dollar to weaken.

It is now picking the NZ dollar to sit in a range between 67 cents and 72 cents through to the middle of next year.

“Given the uncertain outlook, corporate hedgers and fund managers should look to take a more neutral position,” he said. 

The kiwi dollar was trading at 69.42 US cents today, up from 69.19 cents yesterday but down from 70.23 cents ten days ago.

Tags: Market Close

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