NZ shares break nine-year winning streak

The New Zealand stock market slipped 0.4% in 2021, ending a nine-year positive streak as future earnings look to be increasingly in doubt.

Friday, December 31st 2021, 2:07PM

by BusinessDesk

On the day, the S&P/NZX 50 Index edged down 0.06%, or 7 points, to 13,033.77. Turnover across the main board was quiet at $39.9 million.

“Ten-year bond yields have gone from around about 1.2% to 2.4% so the discount rate for future earnings has risen sharply,” said Matt Goodson, director at Salt Funds Management.

The spectre of inflation is a key factor.

“Long-term bond yields have discerned that inflation is back. While some of it is transitory, some of it is not and central banks have fallen far behind the curve and will have to tighten a number of times in 2022,” he said.

Higher interest rates tend to push investors out of the stock market and into other asset classes. Against that backdrop, the market has actually performed quite well, said Goodson.

What does 2022 look like?

However, the question for 2022 is what the recovery looks like, he said. “Are we in an environment of reasonable growth with inflation, which can actually be quite a good environment for equities?” asked Goodson.

“Or, are we in a more stagflationary environment of inflation but no growth, which would actually be a very difficult market for all financial assets.” According to Goodson, the jury is still out.

Meanwhile, with little news to drive things on the day, investors appeared to take their lead from the Australian market, which opened softer after Wall Street turned late in its penultimate trading session.

Top gainers included Wellington Drive Technologies, which added 5.1% to 20.5 cents.

The stock was also one of the top performers for the year, ending up 166% as investors bought into the turnaround story. The standout performer for 2021, however, was Rakon, which added 2% today to end the year at $2.08. The stock opened in 2021 at 58 cents.

Investors are cheered as it successfully navigated its way into new markets following its 1990s and 2000s heyday as a supplier of GPS components for navigation systems and cell phones.

It now largely provides telecoms equipment for 5G networks and datacentre infrastructure. The demand for components for edge networking – subnetworks that are closer to end users but connected to the network core – and autonomous vehicles is expected to fuel further growth.

On the losing side of the ledger was A2 Milk, which added 0.7% to end the year at $5.93, down 51% on the year as it struggles to convince investors it can regain its value despite having a turnaround plan.

A2 Milk is currently facing two class-action suits in Australia, both alleging investors were misled by the company’s inflated forecast of baby formula sales.

Regarding other dairy companies, units in the Fonterra Shareholders Fund added 0.3% to $3.74. It ended the year down 10.5%, clawing back some losses after the co-operative announced a capital restructure that will see the fund capped.

Synlait Milk added 0.6% to $3.46 but tumbled 33.8% on the year, weighed by A2 Milk given their close relationship.

Hedge

Looking into 2022, Goodson said that traditionally equities are a good hedge against inflation.

While the market has yet to decide whether the current inflation is coupled with growth, “within the equity market you need to own equities which actually have positive exposure to the economy”.

“This is something we have been saying for some time but it is probably an environment that favours cyclicals rather than high growth or high growth-yield stocks.”

Other examples are Fletcher Building, Freightways and Mainfreight. All three have already proven to be solid investments.

Mainfreight added 1.7% to $93.90 on the day and ended the year up 37%. Fletcher Building shed 1.1% on the day to end at $7.33 but added 29.6% in 2021 while Freightways also lost 1.1% on the day to close at $12.85 but was up 31.4% this year.

Tags: Market Close